Category Archives: Uncategorized

Scale Doesn’t Scale

A nice rant from Jerry Jarvis on how decentralization of markets is changing the economics of competition. Here’s an excerpt:

: Scale doesn’t scale anymore.

The old days of big players in the economy collecting consumers, audience, distribution, manufacturing efficiency, buying power, or capital in the grip of centralized control are waning. That used to be the way to find efficiency and size. That used to be the way to scale.

But they are being foiled by our new distributed world. And they are being replaced by a more efficient means of finding size and efficiency.

Aggregation is the new scale.

He’s clearly on to something, but I am not sure that "aggregation" describes the essence of the new model.  JSB and I are starting to write about this, so we’ll have more to say on this shortly.  Jerry also is much more effective in discussing how customers are using aggregation to get more value out of vendors, but his few examples about how vendors can use aggregation aren’t nearly as satisfying.

Kotkin’s The City

I just finished Joel Kotkin’s The City, a stimulating historical survey of the rise and fall of cities around the world.  He uses this survey to make the case for the "universality of the urban experience", cutting across the enormous diversity of individual city experiences, and to argue that "urban areas have performed three separate critical functions – the creation of sacred space, the provision of basic security, and the host for a commercial market."  In effect, Kotkin argues that cities prosper when they perform these three functions well and they inevitably decline when they fall short on one or more of these functions.

Kotkin’s book led me to reflect on the role of cities.  My own view is that the three functions he cites are really secondary.  The primary role of cities has been to provide robust concentration points for people and information flows in order to accelerate capability building.  Kotkin quotes Socrates as remarking: "The country places and the trees don’t teach me anything, and the people in the city do."  This captures for me the primary role of cities.  In this context, sacred spaces, security and markets support the primary role of cities.  Sacred spaces have historically been important in creating shared meaning and values that are essential for building trust.  Security provides an environment conducive to learning and development.  Markets generate flows of people, goods and ideas to advance learning and development.  But the reason people come to cities and stay in cities is to get better faster by exposing themselves to a much more diverse and rich set of interactions than they could in less densely settled areas.

As uncertainty increases, I believe this role of cities will become even more valuable.  Rather than seeing more dispersion, supported by the capabilities of robust technology networks, I expect that we will see even more concentration, supported by the need to connect with other people in much richer face-to-face settings.  Concentration points of flows of people, goods and ideas  become strategically important in uncertain environments and cities provide these concentration points.

Although he doesn’t refer to him explicitly in the text, it is clear that Kotkin is highly skeptical of Richard Florida’s focus on cities as concentration points for the "creative class" (see Florida’s great book The Rise of the Creative Class) – at least in the absence of a "sacred place" that can provide a common set of values.  Shared values and a common sense of purpose are important in accelerating capability building, but I believe these are emerging within the creative class while at the same time leaving ample room for diversity.

It is also remarkable to me that Kotkin only makes one passing reference to Jane Jacobs in the text of a book devoted to cities.  Jane Jacobs remains a seminal thinker on this topic and her books – especially The Economy of Cities and the Death and Life of Great American Cities – describe with great insight how cities must continue to evolve in order to survive.

Given this perspective, I believe that a key element of business strategy will be choices about how to most effectively participate in the economies of cities that have the greatest potential to accelerate capability building.  Companies that decide to move their headquarters out to pastoral suburbs may be heading in exactly the wrong direction.

Disney, HP, Morgan

Disney, HP, Morgan Stanley – all companies experiencing executive turmoil, investor dissatisfaction and less than stellar stock performance. yet from very different industries.  Is there anything that these companies have in common that might explain their current troubles?  Most of the business press coverage focuses on CEO personalities, management styles, "culture" clashes and acquisitions that never lived up to their potential.  Analysts call for breaking up the companies to unleash hidden asset values.

These commentaries miss something more fundamental.  These three companies are great examples of once "excellent" companies that lost sight of what business they were in.  Each of these businesses were highly focused product or service innovation and commercialization businesses. They had perfected techniques for designing and introducing new products and services for clearly defined market segments they knew and understood well.  All three companies departed from this focus in the 1990’s and made significant investments designed to enter a completely different business – the customer relationship business.  Disney bought ABC, Morgan Stanley purchased Dean Witter and HP invested heavily in building enterprise marketing and sales capability (the Compaq acquisition was related to this broader investment thrust, but in a way that most analysts have missed.

The performance challenges confronted by these businesses can be traced to these choices.  Product innovation businesses and customer relationship businesses have completely different economics, skill set requirements and cultures.  My article on "Unbundling the Corporation" in Harvard Business Review in makes the case that these are incompatible business types that cannot co-exist successfully within a single corporation. By trying to straddle both, these companies found that they could not be excellent in either. All three of these companies have experienced significant turnover in senior management ranks over the past several months. This turnover will yield little in terms of turnaround unless the more basic issue is addressed and difficult choices made: what business are you really in?  If this question is seriously confronted, spin-offs will surely follow, but they may not be the kind of spin-offs that most analysts are anticipating.

Wolf on China and globalization

God, I hate taxes.  Every year, I put off doing them later and later.  It’s not quite midnight on April 15th, but I am done, at least with filing for an extension.

In the meantime, I have been following Martin Wolf’s recent writing on China.  Martin, an Associate Editor of the Financial Times, is one of the most insightful analysts of globalization trends – for those of you who have not read his Why Globalization Works, I highly recommend it.

Martin is also an optimist regarding China’s ability to sustain its remarkable recent economic growth. He just wrote a column in the April 13 edition of the Financial Times on "China has further to grow to catch up with the world".  In this article, he puts China’s growth in perspective – it has actually grown more slowly than Japan, South Korea or Taiwan during their major growth periods in the second half of the 20th century. In fact, he castigates China for not growing even faster, attributing its shortfall in growth to the inefficiency of investment, with particular emphasis on the wasteful investment in China’s state-owned enterprises.  In an interesting twist, Martin views this inefficiency in investment as a major cause for optimism – there is significant headroom for more rapid growth resulting from the opportunity to increase productivity of investment.  Of course, this assumes that investment can be redeployed into more productive arenas – but there may be limits to this, at least in the short-term, given the reluctance of the government to redeploy funds away from China’s state-owned enterprises.

For those who wonder how important China’s growth prospects are to the world economy, Albert Keidel of the Carnegie Endowment delivered an interesting paper entitled "How is China Shaping Globalization?  Moving from the Engine Room to the Driver’s Seat?" on China’s G8 impact at a symposium in Shanghai last month.

More broadly, Martin Wolf also has a thought provoking lecture that he delivered to the Institute for International Economics earlier this month on "Will Globalization Survive?" contrasting the backlash against globalization in the 1920’s and 1930’s with the risk of a similar backlash today. He makes a compelling case that a number of factors mitigate against such a risk today, but he also acknowledges that

Globalization is not inevitable.  It depends on politics.  In today’s world, it depends above all on US politics.  Without successful US leadership at a time of huge upheavals, the present globalization may founder, just as the last one did. . . Progress or relapse – the choice is largely, but not entirely, the United States’.  History will judge. We can only warn.

For an optimist like Martin, these are grave words indeed. In this context, he cites one of my favorite foreign policy analysts, John Mearsheimer, who participated in an interesting debate in the January/February 2005 issue of Foreign Policy magazine with Zbigniew Brzezinski called "Clash of the Titans" regarding the potential for conflict between the US and China.  This is a real wild card that all business executives will need to focus on as they craft their global investment strategies. 

Aging and Global Capital Markets

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

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

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

The article abstract gives you the key message:

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

The take-away

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

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

Geoffrey Moore on Open Source

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

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

Google Satellite Navigation

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

The World is Flat

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

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

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

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

He then adds:

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

Toward the end, he really pushes the alarm button:

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

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

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

The EPIC death of traditional media?

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

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

Unbundling 7-Eleven

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

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

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

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

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

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