The World Is Spiky

Two writers that I admire greatly – Tom Friedman and Richard Florida – appear to clash with each other.  Tom in his best-selling new book says “The World Is Flat” and Richard in a new article in the October 2005 issue of Atlantic Monthly asserts “The World Is Spiky".Richard’s article is a great read (supported by highly visual maps) and I highly recommend it. Tom and Richard are both right, but they both risk missing the real point.

Richard focuses on one particular quote from Tom’s book: “In a flat world you can innovate without having to emigrate.”  Richard responds that location still matters and that, by a variety of measures, the world is extremely spiky – meaning that activity is very concentrated in a relatively few locations.  Richard looks at

• population concentration in urban areas
• light emissions (as an interesting proxy for economic activity)
• patent filings
• citations to scientists in leading fields to demonstrate this spikiness.

Using topographical metaphors, Richard divides the world into

• peaks – the cities that generate innovations
• hills – “the industrial and service centers that produce mature products and support innovation centers”
• valleys – “places with little connection to the global economy and few immediate prospects”

Focusing on the peaks definitely highlights the spikiness of the world.  For example,

When it comes to actual economic output, the ten largest US metropolitan areas combined are behind only the United States as a whole and Japan.  New York’s economy alone is about the size of Russia’s or Brazil’s . . .  Together New York, Los Angeles, Chicago, and Boston have a bigger economy than all of China.  If US metropolitan areas were countries, they’d make up forty-seven of the biggest 100 economies in the world.

But what does all of this mean?  Flat or spiky? Who is right – Tom or Richard? Here is my take on it – framing the debate in these terms is misleading.  It obscures what is really important.

Flat or spiky – these are metaphors of space.  More importantly, they are static metaphors – they describe a point in time.  The world is either flat or spiky.  What is missing is any sense of trajectories or relative pace of change. Instead of studying snapshots, we need to study movies showing change over time.

Richard’s article offers relatively little in terms of dynamics – with the notable exception of population movements.  Here the evidence from the article is clear – the world is becoming much spikier.  In 1950, only 30% of the world’s population lived in urban areas – today, it is more like 50%. More and more of the world’s population are clustering into cities in search of economic opportunities. Cities are, as they have always been, the flywheel of innovation, talent development, productivity improvement and economic growth.

To the extent that Tom believes that cities will become less important as centers of economic growth, I would disagree with him.  So I would amend his observation and say that, if you want to innovate and you are not in a major urban area, you might want to emigrate to one of these areas, even in a flattening world.  Even though you can participate in innovation from more remote locations, if you want to develop your talent more rapidly than others, you are more likely to be able to do that in a major urban area.

Richard makes an important point: 

Because globalization has increased the returns to innovation, by allowing innovative products and services to quickly reach consumers worldwide, it has strengthened the lure that innovation centers hold for our planet’s best and brightest, reinforcing the spikiness of wealth and economic production.

So, here is where we see the beginning of a paradox – some of the forces that Tom Friedman eloquently describes as flattening the world are at the same time helping to reinforce spikiness.

But then the question becomes, which urban areas will become the most fertile ground for innovation and talent development?  Richard has written extensively and eloquently on this topic in The Rise of the Creative Class and The Flight of the Creative Class. In these writings, he makes clear that creative talent seeks out environments that encourage and reward innovation.  He also makes it clear that talent will migrate to urban areas that provide more promising environments for creativity and innovation.

This is one of the missing elements in Richard’s article. In its focus on describing the spikes that exist today, the article loses the dynamic element of competition among spikes and the speed with which new spikes can emerge – themes that are front and center in his books. Because the world is flattening in terms of connectivity, it is easier for new agglomerations of creative talent to come together and connect into the global economy, whether they are in Shenzhen or Bangalore.

Now, by Richard’s topography, Shenzhen and Bangalore don’t count – they are mere “hills”, not spikes, because they focus on manufacturing and support services.  This distinction reveals another limitation of Richard’s article – he defines innovation much too narrowly as either product innovation (things that can get patented) or more fundamental scientific innovation (citations to scientists).  Shenzhen and Bangalore are extraordinarily innovative as well, but their focus so far has been on rapid incremental process innovation, something that is not so easily measured by Richard’s indices. It is this form of innovation that accounts for extraordinary economic growth in a very short period of time.

By leaving this rapid incremental process innovation out of the picture, Richard misses some of the key dynamics that are already reshaping the spikiness of the global map. Companies in some of the rapidly growing urban areas like Shenzhen and Bangalore are pursuing a powerful form of innovation bootstrapping that starts with relatively modest incremental innovations pursued in rapid iterations and amplified by rich interactions with dense local business ecosystems. This bootstrapping is powerful because it accelerates learning and capability building and ultimately bridges into more fundamental product and technology innovation, as is already happening in areas like wireless technology in both China and India. With aggressive use of bootstrapping, even the most modest hills have the opportunity to become formidable peaks.

In this world, patents and scientific journal citations may be lagging indicators.  What we need to find are the leading indicators that will help us to understand and anticipate the dynamics reshaping the global economy. 

Most of all, we need to move beyond the snapshots – instead, we have to make and study the movies.  This is where real wealth creation will occur. Tom and Richard both understand this, but let’s not frame the debate in terms of flat versus spiky. The greatest insight will come from understanding the paradox that the flattening of the world is creating opportunities for even greater spikiness.

Mary’s Back – The Internet, China and Bubbles

Mary Meeker is back.  As a Managing Director at Morgan Stanley and leader of their global technology research team, Mary was one of the leading analysts of the companies emerging during the first wave of Internet commercialization.  After the bust in 2000, Mary maintained an uncharacteristically low profile but she appears to be resurfacing.

She spoke this week at the Web 2.0 conference in San Francisco on the global mobile platform-driven Web – slides available here (hat tip to Peter Merholz).  The bloggers in the audience seemed overwhelmed by the torrent of numbers but, hey, I like numbers.  I did not get to hear the presentation, so I have to be careful about reading too much (or not enough) into the slides.  Some numbers did stand out though:

• VoIP minutes in Denmark now exceed landline voice minutes
• The market cap of 5 leading Internet companies (Amazon, eBay, Google, Yahoo! And Yahoo! Japan) stood at $178B at the NASDAQ peak on 3/10/00 versus $261B now
• There are 1 billion Internet users in the world today but 2 billion mobile phone users – and Asia trumps North America in both categories with 36 % versus 23 % of users and  41% versus 11 % respectively

Mary also gives an interesting twist on the eBay-Skype merger that I blogged about earlier. She featured it as one of the best examples of a US-based technology company buying a leading non-US technology company with leadership in foreign markets with the intent of bringing the technology into the US market, suggesting this was just the beginning of a lot more of these kinds of transactions.

Even though Mary was featured as giving a global perspective on the Web at Web 2.0, you could tell that her heart was really in Asia, especially China and Korea.  This is perhaps not surprising given the fact that Mary just came out with a major new report on “Creating Consumer Value in Digital China” (pdf of the report available for download), initiating coverage of the China Internet industry. It is a useful overview of some of the leading Internet segments (especially Mobile Value Added Services, Online Advertising, Online Gaming and Online Commerce) emerging in China. The tone is set by a quote from Meg Whitman, eBay’s CEO: “Whoever wins China will win the world.”

Once again, the numbers are interesting.

• China is now No.1 in the world in mobile subscribers and No.1 in Internet users under the age of 30 (there’s a much higher skew in Internet usage towards the younger generation in China – 70% of their Internet users are under 30 and 54% are under 24).
• The US still has more than twice as many users of the Internet, but China has twice as many mobile phone users as the US. At least half of China’s Internet users appear to be accessing it through their mobile phones.

Mary’s report appropriately focuses on the mobile phones as access devices and the corresponding growth potential of mobile content in China:

China, in many ways, is leading the development and monetization of mobile content (i.e. KongZhong, TOM Online) in ways that are still nascent in the US; we believe investors underappreciate the secular trend at work within mobile computing, and the value, both in terms of wealth and consumer satisfaction, that mobile value-added services can contribute.

US executives and investors, reflecting the PC centric infrastructure that prevails here, don’t yet understand the growing importance of mobility in reshaping how we connect together.

Despite the relatively early stage of development of the Internet industry, there are clear early leaders in each of the major Internet segments covered by the report.  Even with these leadership positions and operating margins that typically are 30-40% better than their US counterparts, “China Internet companies are currently trading at 40-60% discounts to their global counterparts.” As the report points out, there are some good reasons for this, given the uncertainty as to how this very large but very early stage industry will evolve. While warning about the challenges facing foreign companies as they seek to carve out larger positions in the China market, the report also worries about the relative lack of innovation by Chinese companies which, to date, seem largely focused on copying successful business models emerging in the US, Korea and Japan.

Based on its assessment of market dynamics and company fundamentals, the Morgan Stanley report highlights three companies as the top investment picks:

• Ctrip – a dominant player in the online travel industry
• NetEase – a leading innovator in the online gaming market
• Tencent – growing off a strong base in the instant messaging market.

Mary’s reappearance and the general atmosphere at the Web 2.0 conference (not to mention some of the recent acquisition prices of early stage Internet companies) have prompted a lot of people to worry about whether we are entering another bubble (of course, they’re not really worried about the bubble, what they’re concerned about is a Bubble 2.0 – there’s actually a blog by this name, with the slogan "Please, God, just one more bubble!" – to be followed by a Bust 2.0). For what it’s worth, Mary apparently suggested that we are experiencing a “boom-let.”

I’ve never been one to consult on stock tips or real estate investments (speaking of bubbles!), but I don’t have the sense that we are at a bubble yet in the Internet arena.  The IPO market is still demanding and most of the new generation of Internet businesses have not had the benefit (or curse) of huge VC funding – they’ve had to bootstrap their way into existence and as a result are generally more firmly grounded than the bloated cash cows wandering around in the 1999-2000 window (with apologies to Boston Consulting Group, these cash cows consumed prodigious amounts of cash, rather than generating it, treating VC funding as a substitute for revenues).

The time to worry is when the VC’s line up to pour large amounts of money into businesses founded by untried venture teams who rely on soundbite business plans (“it’s like an eBay for the plastics industry”).  One red flag came from a report from the Web 2.0 conference posted by Fred Wilson, a venture capitalist from New York, warning about the re-emergence of “second derivatives”:

I heard one business described as Google Maps meets delicious, and another described as Skype meets MySpace.  When the first derivative hasn’t fully figured its long term business model (other than getting bought), the second derivatives are pretty scary.

Here’s another red flag. In the last bubble, financial analysts, desperate for a way to value Internet businesses that had precious little revenue, much less operating profit, hit upon traffic numbers as a key basis of valuation.  That gave rise to some very perverse business practices as Internet sites began to do whatever they could to boost their traffic numbers while ignoring anything that might be required to build a real sustainable business, like building enduring relationships with customers.  Internet start-ups essentially became brief stops for venture capital money on its way to advertising firms designing marketing campaigns to draw the next wave of traffic.

As we move into Web 2.0, we see a similar struggle for quick and easy valuation metrics that might free the weary investor from understanding whether there is a sustainable business behind the numbers.  One recent blog posting sought to assess the recent acquisition price for WebLogs, Inc. by AOL in terms of the number of links to WebLogs blogs from external sites.  I sure hope that method of valuation doesn’t take hold.  Like traffic, it offers some interesting information but, if it becomes a primary metric, it can lead to some very dysfunctional behavior.

We’re not quite into a full-fledged bubble yet, but I do worry about some of the early signs that the investment floodgates are opening up. In times like these, I guess it pays to be philosophical.  Periods of great innovation are generally accompanied by boom and bust cycles – booms and busts help to accelerate learning.  They can certainly be painful for individual entrepreneurs and investors, but the lessons will be valuable for everyone.

By the way, Henry Blodget is back, too.  He was sighted at the Web 2.0 conference and has launched a blog – The Internet Outsider.

Web 2.0 Redux

The blogosphere has been grappling overtime with the Web 2.0 meme over the past week. Perhaps the most significant event was the release of Tim O’Reilly’s long awaited What is Web 2.0 article. I have no doubt that this paper will become a seminal work much like the Open Source Paradigm Shift paper he produced last year. In a separate posting, Tim even overcomes his hesitation about trying to define concepts too concisely to offer Web 2.0: A Compact Definition.

Tim is clearly reluctant to craft formal definitions with hard and fast boundaries.  As he notes in a blog entry, “I tend to think about the gravitational core that holds a solar system of ideas and experiences together, rather than some kind of box to contain them.” This instinct is certainly a healthy one – especially in emergent areas characterized by rapid change. Stories and examples work far better in capturing the texture and richness of what is going on than abstract concepts. Trying to impose boundaries too early limits the imagination.

On the other hand, if we treat definitions with a little less respect – not as "formal" or "official", but as tentative efforts to identify and debate the essence of new phenomena – they can help to shed light on what is really new and different, engage those who are still on the periphery and perhaps shape on the margin the next wave of initiatives. If we approach them in the right spirit, debates around definitions and boundaries can help to generate productive friction, allowing us to see new dimensions of complex phenomena and leading to new insight.

In his What is Web 2.0 article, Tim offers a rich exploration of the Web 2.0 terrain in a way that certainly spurs the imagination and helps to clarify the diverse elements coming together to form Web 2.0.  In particular, he offers seven principles that are shaping Web 2.0:

• The Web As Platform
• Harnessing Collective Intelligence
• Data is the Next Intel Inside
• End of the Software Release Cycle
• Lightweight Programming Models
• Software Above the Level of a Single Device
• Rich User Experiences.

As these headings suggest, Tim is focused on characterizing the technology elements that provide the foundation for Web 2.0. This is totally appropriate since Web 2.0 is made possible by new technologies and new ways of organizing technology. From my perspective, there are few people better equipped than Tim to identify and understand these technology elements.

Tim remains technology focused in his Compact Definition:

Web 2.0 is the network as platform, spanning all connected devices; Web 2.0 applications are those that make the most of the intrinsic advantages of that platform: delivering software as a continually-updated service that gets better the more people use it, consuming and remixing data from multiple sources, including individual users, while providing their own data and services in a form that allows remixing by others, creating network effects through an "architecture of participation," and going beyond the page metaphor of Web 1.0 to deliver rich user experiences.

His definition emphasizes the role of the network as a platform, but spends the bulk of its time highlighting what is different about applications in a Web 2.0 world.  I particularly like his formulation of the Janus nature of Web 2.0 applications, facing in two directions at the same time – on the one hand, consuming and remixing data from multiple sources while at the same time providing data and services in a way that allows remixing by others. These two faces explain both the opportunities for bootstrapping or scaffolding and the network effects that shape the potential for significant value creation. (By the way, I am intrigued with one possible definition of Web 2.0 that goes something like this: a network centric platform for bootstrapping businesses. I touched briefly on bootstrapping in general here, but I am struck by how powerful Web 2.0 is as a bootstrapping medium.) When you combine these two faces with the notion of software as a continually updated service, you have the formula for much more rapid movement in building large scale businesses.

This is a great definition for application developers.  It helps them to understand both what is different about Web 2.0 applications and why developers should care about these differences. It is particularly appropriate given the Web 2.0 conference that Tim O’Reilly will be hosting this week.  This conference will serve as another kind of “gravitational core” drawing technologists from all over the world trying to make sense out of the latest developments on the Internet.

But I spend most of my time dealing with business execs who view technology as an enabler – their natural (and not unreasonable question) is: so what does this enable? In his paper, Tim hints at some of the implications, but they are still largely framed in terms of implications for technology companies and especially software developers.

Tim talks a bit about Amazon and eBay as examples of companies that emerged in the Web 1.0 world and transitioned successfully into the Web 2.0 world – these are clearly much more than software companies. Many have written about the potential impact of Web 2.0 on media businesses and retailers and other kinds of distribution businesses.  I, for one, do not believe that the impact stops there – it ultimately re-shapes virtually all forms of business activity (with the possible exception of snow removal businesses and lawn cutting services).

Since I deal with business executives in industries ranging from software to petroleum (no snow removal businesses as clients), I tried to frame a definition of Web 2.0 that makes it clear that the impact extends far beyond the technology arena:

an emerging network-centric platform to support distributed, collaborative and cumulative creation by its users

(This definition is developed in greater detail here)  All businesses will be using this platform.  All businesses had better figure out what it means to engage in “distributed, collaborative and cumulative creation” and adjust their business models and capabilities accordingly. This is not just an issue for technologists. (And, by the way, I have tried to frame the definition in a way that is not just relevant for business executives – think about the implications of “distributed, collaborative and cumulative creation” for policy-makers, educators or consumers).

Once business execs start to get their minds around the implications of distributed, collaborative and cumulative creation, two things happen: They begin to see how profound this is in terms of reshaping business activity and opportunities for value creation They are deeply motivated to understand the technology drivers that are making this more pervasive.

In reflecting on the many discussions of Web 2.0 that have surfaced online over the past couple of weeks, I have found it useful to step back from each contribution and ask three questions to test the value of the contribution:

• Does it really make clear what is different about Web 2.0?
• Does it tell us why we should care?
• Does it make assumptions about who should care – i.e. are we explicitly or implicitly addressing technologists, business people or some other constituency?

With these questions in mind, you might be interested in surfing through some of the other contributions to the Web 2.0 conversation that have surfaced over the past week:

• Chris Anderson at The Long Tail – where he suggests that "the lack of a crisp definition is a feature, not a bug"
• The Devil’s Dictionary (hat tip to Pete Cashmore at Mashable)
• Barb Dybwad at The Social Software Weblog
• Dion Hinchcliffe at his Web 2.0 blog
• Steven Berlin Johnson at his own blog who helps us to understand why Web 2.0 is like a rainforest while Web 1.0 is like a desert
• Richard MacManus at Read/Write Web
• and, last but certainly not least, Ken Yarmosh at Technosight who helped to orchestrate a first-ever blogoposium where contributions can be accessed through del.icio.us or technorati.

There are some interesting graphic attempts to capture the essence (or complexity) of Web 2.0 at Flickr here (for Tim O’Reilly’s original meme map), here, here and here.

Also, check out Richard Veryard’s early attempt to trace out the contours of SOA 2.0 – he suggests there is more to come on this one.

Technorati tags: Blogoposium1 Web2.0

What is Web 2.0?

Listening to the wide-ranging conversations regarding the Web 2.0 meme, I keep coming back to the old Buffalo Springfield lyric in “For What It’s Worth”: “There’s something happening here, what it is ain’t exactly clear.”

The skeptics like Tim Bray point out that this concept has come to mean anything that the speaker wants it to mean. The champions, most notably Tim O’Reilly, volley back that the rapid spread of the meme indicates that it “does capture the widespread sense that there’s something qualitatively different about today’s web.”

There’s no denying that the meme has taken hold, having been developed only about 18 months ago by Dale Dougherty of O’Reilly Media. Unfortunately, as the Wikipedia entry on Web 2.0 reports, Dale never really defined the term, using examples rather than a definition to communicate its meaning: "DoubleClick was Web 1.0; Google AdSense is Web 2.0. Ofoto is Web 1.0; Flickr is Web 2.0."

Many people since have attempted a definition, most notably Richard MacManus here and here, Martin at the Mediatope blog, Jay Cross and Dion Hinchcliffe.  Tim O’Reilly promises an article on “What is Web 2.0” while in the meantime offering a list of Web 2.0 “design patterns” and a Web 2.0 Meme Map (hat tip to Chris Anderson).  There are even dedicated Web 2.0 blogs here, here and here.

It is striking to me that virtually all of these definitions end up being lists of one type or another. They seem to be focusing on examples, components or dimensions of Web 2.0 without really getting to the essence of the concept.  Since I have enormous respect for the folks who have tried to capture the meaning of this term, I suspect there is probably good reason why they have stayed at the level of examples, components or dimensions and avoided the temptation to try to capture the essence.

Yet, in looking at these lists, I can’t help but feel that there is an essence behind the term that is waiting to be captured.  So, in the spirit of entering the conversation, let me suggest that Web 2.0 ultimately refers to “an emerging network-centric platform to support distributed, collaborative and cumulative creation by its users.” Let’s look at each element of the definition separately:

Platform. Platform is an important concept because it suggests a foundation that is meant to be built upon rather than self-contained. 

Emerging. It is emerging because it supports extensions to itself, facilitating a bootstrapping process to create very complex functionality from very simple building blocks. Web 2.0 is far from a finished product, it is a rapidly evolving platform.

Network-centric. In contrast to other technology platforms like PCs or mainframes, it is not a standalone platform, but instead Web 2.0 is built upon an open network, making it pervasive, extending across the entire globe. As a network-centric platform, it is device-independent – it is meant to be accessed by devices of all kinds, ranging from PCs and mobile phones to RFID tags and bio-sensor devices.

Creation. The ultimate purpose and significance of the platform is to support creation, not just communication or participation in sharing of interests. This is what makes it truly distinctive relative to previous generations of networks. We’re also not just talking about creation of media or digital products and services – this platform is becoming central to the creation of a broad range of physical products as well.

Users. Rather than viewing creation as a highly specialized activity, this platform encourages users of all types to become involved in the creation process.  The well-established boundaries between producers and consumers and professionals and amateurs are rapidly eroding.

Distributed. Because it is pervasive, Web 2.0 facilitates distributed creation – it doesn’t matter where the individuals or communities reside, they can access the platform.

Collaboration. Because it is built upon a network, it also enhances the potential for collaboration.  We are not talking about isolated nodes of creation, but instead the ability for individuals and communities to connect together in the creative process in ways that were never possible before.

Cumulative. Perhaps the most important aspect of this platform is that it encourages cumulative creation.  This stems from the modularity that is a key design principle of Web 2.0 and it has profound implications for creative activity.  It means that wherever and whenever creative activity occurs, it can be appropriated and built upon by others, further strengthening the bootstrapping process. Since what is being created is meant to be shared, it becomes less and less useful to think of the output as products and much more important to view the output as services that in turn support the creation of other services.

Because of the focus on creation, I am very taken with Ross Mayfield’s formulation that “the web is increasingly less about places and other nouns, but verbs.”

In many respects, Web 2.0 represents a return to origins of Internet.  The original goal of the pioneers developing and deploying the Internet was to connect researchers and their computers together so that they could more effectively pursue their research in distributed locations.  The addition of the World Wide Web in the early 1990’s, despite the best intentions of its key developer, Tim Berners Lee, ended up representing a detour from that original vision.  Although there were certainly exceptions, Web 1.0 largely consisted of stand-alone web sites for specialized publishers and vendors seeking to more effectively reach audiences and consumers. It was a broadcast and distribution medium, rather than a creation medium.  Web 2.0 changes all that.

While the Web 2.0 definition I propose may lead some people to focus attention on the technologies required to build this emergent platform, I agree with Tim O’Reilly that it is more helpful to describe it as a mindset.  Technologies alone can only do so much – they are ultimately only enablers.  The real power is in the mindset that will be required to re-shape economic, social and legal frameworks to exploit the full potential of the technology.

I hope that these economic, social and legal issues get as much, if not more, attention in the forthcoming Web 2.0 conference organized by Tim and others.

Attention on China

Executives often ask me what are the biggest uncertainties shaping the evolution of the global economy.  My immediate answer is that political forces are by far the most uncertain.  Demographic, technological and economic forces are playing out in relatively predictable patterns. But the big wild card is in the political arena, ranging from intellectual property regulation to global geo-political tensions.

We are experiencing accelerating change on a global level. New economic forces are rising and challenging entrenched institutions within enterprises and across enterprises, industries and countries. History tells us that rapid economic change usually signals political instability, often leading to violence either in the form of revolution or war (or both). Entrenched interests resort to political means to protect their positions and emerging interests often resist these efforts with increasing intensity.

I have written about the fragility of the globalization process earlier in this blog.  One of the deepest fault lines emerging on the global stage is the economic rise of China and its potential challenge to more established Western powers, especially the United States. We have seen growing media attention to this fault line in recent months, attention that seems to have been catalyzed in particular by the recent failed bid by Chinas’s CNOOC to acquire Unocal Corp.  In fact, while this media attention is relatively recent, policy makers have been focused on this for a lot longer.

The Wall Street Journal published a front page article on September 8, 2005 entitled “Inside Pentagon, A Scholar Shapes Views of China”, chronicling the significant influence of Michael Pillsbury on Pentagon thinking.  The article reports:

Chinese writings, Mr. Pillsbury says, show a military establishment obsessed with the inevitable decline of the U.S. and China’s commensurate rise. On the economic front, he cautions that Americans shouldn’t be taken in by the profusion of fast-food restaurants in China or other signs that make China look like the West.  Beneath the growing trade ties with U.S., he says, runs a nationalistic fervor that could take American investors by surprise.

The Pentagon is planning to publish a new book this fall by Pillsbury entitled “The Future of China’s Ancient Strategy” which argues that “China’s history and culture posit the existence of a ‘hegemon’ – these days, the United States – that must be defeated over time.” Pillsbury’s influence suggests that policy makers in the Pentagon have been concerned about China’s rise for quite some time.

A flavor for the discussions within policy making circles can be garnered from a debate published in the January- February 2005 issue of Foreign Policy entitled “Clash of the Titans”.  Zbigniew Brzezinski and John J. Mearsheimer (a Professor of Political Science at the University of Chicago, a leading “realist” international affairs theorist and author of the extremely insightful book The Tragedy of Great Power Politics) debate the possibility of peaceful co-existence between the US and China. Mearsheimer is blunt:

China cannot rise peacefully, and if it continues its dramatic economic growth over the next few decades, the United States and China are likely to engage in an intense security competition with considerable potential for war.

On the other hand, the Financial Times published a lengthy commentary by the always insightful Martin Wolf in its September 15, 2005 issue entitled “Though Precedents Are Ominous, China’s Rise to Greatness Need Not Bring Conflict” (only available to subscribers).  Wolf begins on a cautionary note:

The precedents are also ominous. In the late 19th century, the rise of four new powers – the US, Germany, Russia and Japan – shattered global stability.  The results included two world wars, the communist revolutions in Russia (towards the end of the first world war) and in China (in the aftermath of the second world war) and, finally, the cold war.  Only with the fall of the Soviet Union did the US emerge as victor in a struggle that lasted a century.

Wolf goes on to outline three powerful reasons that he believes make conflict less likely as China rises on the global stage. Wolf concludes by observing that:

Relations between the two powers will never be warm.  But they could be workmanlike . . . . Both powers should see the benefits of co-operation rather than conflict. . . . Provided their leaders recognize the need to sustain peace and co-operation, they should be able to manage their relations.  We must hope they do so. The fate of the world depends heavily on it.

Tom Friedman is even more of an optimist on this front.  In his book The World Is Flat he outlines his “Dell Theory of Conflict Prevention” (complementing his earlier “Golden Arches Theory of Conflict Prevention”):

The Dell Theory stipulates: No two countries that are both part of a major global supply chain, like Dell’s will ever fight a war against each other as long as they are both part of the same global supply chain.  Because people embedded in major global supply chains don’t want to fight old-time wars anymore. They want to make just-in-time deliveries of goods and services – and enjoy the rising standards of living that come with that.

I wish I could be that definitive.  Market relationships without a doubt have a significant dampening effect on political conflict.  But the gales of creative destruction that markets bring with them can have the opposite effect. The rapid growth of a market economy will undoubtedly disrupt and threaten traditional social and political relationships in China.  Those who hold political power there are making an enormous bet that markets and authoritarian political rule can co-exist.  If the bet holds and they can sustain authoritarian political rule, they will certainly be tempted to leverage greater economic power into greater military power and ultimately challenge established powers for regional hegemony. If the bet begins to falter, they may well resort to nationalism and international conflict as a way to unify the domestic population and tighten their political control.

As the Chinese economy continues to grow and Chinese companies begin to pose a greater competitive challenge to Western companies, the latter may be tempted to lobby at a minimum for protectionist measures and perhaps even begin to push for more aggressive actions by Western governments to counter the Chinese “threat”.

We are already hearing growing concern about rising Chinese demand for raw materials in the global market. For example, see the article by David Zweig and Bi Jianhai on “China’s Global Hunt for Energy” (only abstract available without purchase) in the September/October 2005 issue of Foreign Affairs (this issue contains a number of other important articles on China’s increasingly important role in international affairs).

There is enormous uncertainty in how this will play out.  In such circumstances, business executives need to be careful to design robust strategies that have the potential to succeed in multiple scenarios.  The Financial Times featured an article on September 23, 2005 entitled “Fortune Favours the Forward-Thinking” (for the life of me, I can’t find it online at the FT site – it appeared in a special section labeled "Mastering Risk") by Eric K. Clemons, Steve Barnett and Jaron Lanier presenting four scenarios regarding China’s evolution.  The scenarios are interesting, but I think they reveal a lot more about Western biases towards China than they do about the likely evolution of China.

For example, two highly plausible scenarios are not even captured in the article.  One scenario is that China evolves as a global center of management innovation, creating enormous economic value for its own enterprises and for consumers around the world, undermining its authoritarian government, posing significant competitive challenges for Western companies and catalyzing wrenching economic and political changes in Western countries, leading ultimately to a fundamental realignment of global political power.  Another scenario is that China’s vigorous economic growth strengthens the country’s nationalist traditions and that an authoritarian government becomes increasingly confrontational with the US on the global stage, mobilizing support from other prominent countries who are seeking to contain US power internationally while at the same time strengthening domestic support.

One thing is certain.  If lobbying by business and/or labor interests succeeds in restricting trade, the chances for highly disruptive political and military confrontations will rise dramatically.  In this regard, the insight of Frederic Bastiat, the brilliant 19th century French economist, is critical: “When goods cannot cross borders, armies will.” Unfortunately, the converse is not always true. Tom Friedman notwithstanding, trade can threaten entrenched economic interests and these interests may in turn resort to political means, including military action, to protect their income and assets.

The best way to reduce potential political disruptions is for Western companies to focus on increasing their competitiveness in global markets, not just on a stand-alone basis but also in collaboration with many of the entrepreneurial companies emerging in China and other parts of Asia. As JSB and I suggest in The Only Sustainable Edge, public policy needs to be re-conceived in terms of accelerating talent development. There will continue to be significant potential for political disruptions domestically in China but, by focusing on China’s economic growth in a constructive way, in terms of strengthening our own competitiveness, we will reduce the risk that these domestic political disruptions will spill over onto the international stage. 

Bootstrapping

I write a lot about business trends and concepts.  I also spend a lot of time reading through business literature (is that an oxymoron?). We are drowning in business concepts – there seems to be a new one introduced every five minutes. I admit that I am partially to blame for burdening over-stressed executives with even more concepts.

And yet . . . there’s one concept that I haven’t seen developed very systematically in serious business analysis – it’s the management technique of bootstrapping. It’s been on my mind recently because I have been doing a lot of work recently with JSB on new management techniques in China and India that represent a form of bootstrapping.  I am also familiar with the concept from work on the evolution of complex adaptive systems. And the concept seems to be resurfacing in technology circles as part of the continuing interest in Doug Engelbart’s work back in the 1960’s (see for example the book by Thierry Bardini on Bootstrapping: Douglas Engelbart, Coevolution, and the Origins of Personal Computing).

Wikipedia does a nice job of exploring the meanings of bootstrapping in a variety of disciplines and contexts.  At its core, though, in the words of Wikipedia, bootstrapping refers to “processes whereby a complex system emerges by starting simply and, bit by bit, developing more complex capabilities on top of the simpler ones.”  In other words, bootstrapping is about capability building.

It is a widespread phenomenon, visible in biological evolution (indeed, it may even have played a role in the emergence of life itself) and a wide range of other complex adaptive systems. In this context, most of the discussions treat bootstrapping as an emergent process – it is something that plays out on its own, governed by its own dynamics.

I am more interested in bootstrapping as a set of management techniques that can be applied to build capabilities more rapidly and more effectively.  This has been discussed a bit in the context of entrepreneurial startups – for example, Guy Kawasaki’s new book The Art of the Start devotes a chapter to the topic. A Google search turns up a lot of stuff in a self-help genre (e.g., “10 easy ways to bootstrap your business”).

I am curious why more serious work hasn’t been done on this topic. Maybe I just haven’t run across the right material.  If so, I would welcome pointers to serious and systematic treatments of the management techniques involved in bootstrapping.

It is a powerful concept with implications for business far beyond the startup world. It potentially helps businesses to cope with accelerating change and growing uncertainty, provides an interesting new way to think about leverage, learning and innovation, enhances scalability of business operations and may even provide a key to at least one form of increasing returns. It is also a critical concept for economic development.

Perhaps as businesses grow larger and gain access to more resources they lose interest in bootstrapping as a management technique.  That would be a big mistake.  Bootstrapping imposes both a discipline and a creativity that has enormous value regardless of the scale of operations.  If we need a reminder of that, just look at the bootstrapping that continues to shape the vast ecosystems encircling our globe.

Rethinking Risk

Edges are risky places.  Yet they are also rich in learning and innovation potential. To successfully explore and navigate along edges, executives must learn how to more effectively manage risk.

Steve Weber (a Professor at UC Berkeley and the author of a great book, The Success of Open Source) and Eamonn Kelly (the CEO of Global Business Network and the author of a forthcoming book – Powerful Times: Rising to the Challenge of our Uncertain World) wrote a nice piece for the Financial Times on “The Changing World of Risk”, calling for a shift in mindset and focus in managing risk.

Weber and Kelly suggest that “most risk management today is based on coping strategies that manage downside risk.”  These coping strategies involve the use of increasingly sophisticated risk models, elevating the risk function within the corporate hierarchy and acting conservatively.  They argue that these coping strategies are increasingly inadequate: “Loss aversion is not a long-term way to win.  In expanding markets the smart hopeful will always beat the fearful.”

Weber and Kelly go on to observe:

We believe that coping strategies, while remaining a necessary part of any corporate strategy, will in the future increasingly be seen, used and priced like utilities that everyone simply must have. But they will not be a source of significant and sustained advantage – that will come from seizing the upsides of risk. . . . . the ‘unknown’ or at least ‘the uncertain’ will become increasingly important as a source of competitive advantage.

As a balance to coping strategies, Weber and Kelly encourage executives to “re-embrace risk as a source of adaptive advantage”, observing that

When advantage lies most profoundly in the unknown and the uncertain, the ability to sense and learn faster, to correct mistakes and drop losing bets, to tolerate ambiguity and live with, even embrace, ambivalence, becomes absolutely essential

Unfortunately, their focus on adaptation obscures one of the best ways to manage risk.  Rather than just treating the environment as a given, executives need to realize that in times of rapid change and uncertainty, significant opportunities to shape the environment arise.  Opportunities often exist to shape the environment in ways that would just not be possible in more stable times. By being alert to these opportunities, executives can both increase the potential upside from their business initiatives while reducing the potential downside.

Edges often provide the most significant shaping opportunities.  This is one more reason to seek out, rather than avoiding, the edges on the business landscape.

EBay and Skype

I use and love both eBay and Skype. I admire their management. They are extraordinary businesses and epitomize the disruptive potential of the Internet and the creative potential of virtual communities. And yet I am struggling to make sense of eBay’s acquisition of Skype. The deal makes more sense for Skype and its shareholders, but I have a hard time buying into the deal from eBay’s perspective

My best read on the acquisition is that it is one more example of “The Curse of the High Multiple.”  Many of the CEOs that I serve as a consultant struggle with low P/E ratios and look longingly at the high flying companies that sport high multiples.  I certainly sympathize with their frustration and work with them to boost the performance of their companies. At the same time, I warn them that high multiples have their own challenges.

What do you do for an encore?  Once your company ascends into the stratosphere and convinces shareholders that it has extraordinary potential for profitable growth, what does it do then?  Well, you have to deliver.  The higher the multiple goes, the more challenging it is to meet those expectations.  And that’s just to hold your stock price at current levels.  If you actually want to raise your stock price further (and most CEOs with large stock and options holdings certainly want nothing less), then you need to somehow raise expectations even further – and then deliver against this even higher bar.

The pressure can become overwhelming. It pushes companies to look for really big plays that can feed the expectations engine (and potentially divert attention from the slowing growth in existing businesses).  Since organic growth rarely delivers big enough impact (especially once a company moves beyond a certain threshold of size), management starts to rev up the acquisition engine.  Unless the industry is extremely fragmented and there are lots of consolidation plays, the pressure to find large new growth vehicles pushes management far afield from their core business. With the stock price at such a high level, capital is cheap and the temptation to acquire new businesses becomes even stronger. At the extreme, it can push companies like Enron and WorldCom over the edge, where executives end up manipulating numbers in fraudulent ways to keep the treadmill going faster and faster.

Even in businesses like eBay and Skype with strong increasing returns characteristics, increasing expectations begin to outpace the increasing returns. From my experience, CEOs of high multiple businesses rarely sleep any better than CEOs of low performing businesses – unless they are coming up to their retirement date and are about to cash out on their stock holdings in the company.

If I look at the materials released by eBay (warning: 3.5Mb PDF download) at the time of the announcement, I can’t help but feel that we are seeing the curse of the high multiple in action.  It’s a good presentation with lots of helpful material, but when I step back from it, I still get the feeling that this is ultimately about entering a new, high growth business to compensate for slower growth in the core business. As a result, I share some of the early skepticism of folks like Rob Hof at Business Week and Om Malik at Business 2.0.

The eBay presentation talks eloquently and at length about the role of Skype in accelerating commerce on eBay and opening up new lines of business, new monetization models and new geographies.  I agree that adding voice to transactions makes for richer communication and reduces friction, especially in certain types of transactions and certain national cultures.  But then again, adding shipping services helps to reduce friction as well – does that mean eBay should go out and buy FedEx? Yes, markets are conversations as Ross Mayfield reminds us, but does that mean you need to buy a phone company to participate or even orchestrate those conversations?

Pay per call lead generation models are an interesting step beyond pay per click models, at least for certain kinds of businesses.  There clearly are interesting opportunities to cross market to each other’s user base (one interesting statistic from the presentation – there is only a 1% overlap in their US user base – although this can be read both ways, as either an opportunity or a challenge).

But here are the bottom line questions:

• Is this acquisition going to improve the performance of the individual businesses in ways that either would not be possible or at least would be much more expensive without an acquisition?
• Are there any other business relationships short of acquisition that could have produced these improvements in performance?
• Will the improvement in performance be sufficient to earn an acceptable return on the very high price paid for Skype?
• Why couldn’t eBay simply have licensed Skype’s (or any other VoIP provider’s) service and embedded it in its platform to deliver voice-enriched transactions or pay per call lead generation programs?
• Why couldn’t they have negotiated cross-marketing programs to reach each other’s user base?

Both companies face intense competitive challenges in the years ahead.  EBay is clearly concerned about Google.  Skype should be concerned about a growing array of challengers in the VoIP arena.  Acquisitions have a way of distracting management attention from challenges in the core business. They also reduce the sense of urgency – if my core business is under attack, I will be much more aggressive in my response if I have no other business to fall back on.

In fact, both companies face very similar competitive challenges:

• They need to reposition their businesses as more open platforms encouraging applications and services to be built on top
• They need to deliver more value to their users based on profiles of their activities
• They need to develop more of the virtual community opportunities latent within their user base.

Umair Haque presents some interesting charts highlighting the challenge of eBay’s economics relative to Google’s economics, but I am not sure he is compelling about why the acquisition is a necessary step in addressing this challenge.

In the end, I worry that high multiples produce dysfunctional behavior, as we saw in the Internet bubble at the end of the 1990s.  Two big warning signs of dysfunctional behavior have emerged in the discussion surrounding this acquisition.

First, David Kirkpatrick proclaims that eBay may be creating the “first genuine conglomerate of . . . the Contribution Economy”, arguing that the companies are actually very similar.  We have spent most of the past thirty years unwinding the conglomerates that destroyed shareholder value, but now we are going to inaugurate a new age of conglomerates? On what basis?

Second, one commenter to a posting on a blog asserted that “it’s all about eyeballs and traffic” without any apparent hint of irony or sarcasm. This is what got us into trouble during the last bubble – have we learned nothing? 

Look, I am the first one to concede that my views are jaded by several decades of working with senior executives who embarked on large acquisitions in the hope of creating value, only to discover that they destroyed value.  My comments probably suggest a profound failure of imagination on my part, but I just don’t get it.

Katrina and Institutional Resiliency

In the aftermath of Katrina, the only thing more discouraging than the sad images of people struggling to cope with the devastating impact of a natural disaster is the finger-pointing that overwhelms our media.  The search for the guilty is well under way.  Our national instinct appears to be that individuals are to blame and they need to be exposed and held accountable.  No doubt at this level there is a lot of blame to go around – I have a feeling that few of the decision-makers in the various government agencies from local parishes in New Orleans up to the federal government will escape unscathed.

But I also have a feeling that this search for guilty individuals is missing the real point. It assumes that if we can just find the guilty parties and remove them, everything will be OK.  Perhaps this natural disaster will serve as a wake-up call to reassess the systems we put into place to deal with such unforeseen events and, even more basically, to challenge the assumptions that shape these systems.

John Robb points to an NPR radio interview with Yossi Sheffi, a professor of engineering systems at MIT, who contrasts the proactive actions of a number of companies in dealing with this natural disaster with the bureaucratic response of the government.  Sheffi, who is about to publish a book on The Resilient Enterprise, highlights a number of elements required to respond to unforeseen disruptions:

• push decision-making to the periphery
• instill a culture of communication throughout the organization
• create a sense of urgency in responding to events before they become even more damaging.

Sheffi also emphasizes the importance of standardization, modular design and collaborative relationships with other institutions as important tools to build resiliency. These themes help to explain why global process networks are becoming more prevalent in the global economy.

Now, to be clear, few companies have successfully implemented these elements. But it seems that our government, if anything, has moved in the opposite direction, adding more layers of decision-making in new bureaucracies like the Department of Homeland Security, rather than exploring ways to push effective decision-making to the periphery. As part of this institutional reassessment, the government might also want to figure out more effective ways to harness and amplify the many examples of spontaneous order that emerged both within and outside New Orleans in the aftermath of Katrina, rather than seeking to suppress or limit these efforts. Katrina provides an expensive lesson that our public institutions are still ill-equipped to handle unforeseen disruptions.

Gladwell’s Cellular Church

What do the Communist Party, Alcoholics Anonymous, evangelical Christians and al-Qaeda all have in common?  They adopted and refined the technique of organizing in small cells to achieve change.  This is the fascinating theme of Malcolm Gladwell’s new article, “The Cellular Church” (alas, not available online), in the September 12, 2005 issue of The New Yorker (actually, I added al-Qaeda to the list based on a posting that I will mention later).

Gladwell uses the story of Rick Warren’s Saddleback Church in Orange County, California to make this theme come alive.  For those of you not familiar with Rick Warren, he is the author of The Purpose-Driven Life (23 million copies sold so far and it is just getting started) and founder of the Saddleback Church, an evangelical Christian church with 20,000 members in its congregation and the hub of a global network of 1,100 other evangelical Christian churches.

Gladwell focuses on a core challenge confronting any voluntary organization – how to make it scalable.  On the one hand, many voluntary organizations want to grow so they need to have low barriers to entry. But if they grow too fast or too big, they begin to lose the sense of community and identity that is necessary to retain members. He notes that “historically, churches have sacrificed size for community” but that this changed back in the 1970s and 1980s when the evangelical movement began to build megachurches. It turns out the cellular model has been key to the success of megachurches – cells helped them to solve the scalability challenge.

What are these cells?  Gladwell observes that they are “exclusive, tightly knit groups of six or seven who meet in one another’s homes during the week to worship and pray.” It turns out, at least 40 million Americans now participate in a religious cell of this type. This is also the organizational model that led to the early success of the Communist Party and the continuing success of Alcoholics Anonymous and its many spin-offs.

As Gladwell reports,

Warren’s great talent is organizational. He’s not a theological innovator. . . . What he wanted to learn was how to construct an effective religious institution. His interest was sociological . . . The contemporary thinker Warren cites most often in conversation is the management guru Peter Drucker, who has been a close friend of his for years.

In his article, Gladwell focuses on the role of cells in building tight social bonds among people who share common interests – he mentions one church cell of mountain bikers that “go biking together and . . .are one another’s best friends.” But there is another even more fundamental theme in the article that makes this story more relevant to business executives.

Gladwell draws a distinction between self-help books that are inward-focused, “focusing the reader on his own experience,” and Warren’s book which begins with “It’s not about you” and instead draws the reader into a program of personal and social change that requires the participation of others. Warren’s book serves as a powerful coordinating mechanism for a highly distributed network.

Gladwell quotes Robert Wuthnow, a Professor of Sociology at Princeton who has spent many years studying the evangelical movement (Wuthnow is also the author of the interesting book Loose Connections: Joining Together in America’s Fragmented Communities):

Small groups cultivate spirituality, but it is a particular kind of spirituality. . . . They provide ways of putting faith in practice.  For the most part, their focus is on practical applications, not on abstract knowledge, or even on ideas for the sake of ideas themselves.

These groups are not just worshipping and praying together, they are contributing time and money to change the world. They provide a forum for taking initiative, building something very new and making a difference.  Depending on your religious and social views, you may not necessarily agree with what they are building, but they are driven by the desire to create something quite different, rather than passively listening to sermons and reading scripture.

I look for patterns. I see the spread of the evangelical movement with its cellular structure as just one illustration of a much more profound shift in society.  I blogged earlier about distributed creation and production in such diverse domains as music (remix), extreme sports and even illegal drugs, not to mention open source software and electronics devices.  We are seeing this same pattern play out in the evangelical movement.  We are moving from consuming religion in central locations to producing (or re-producing) it in our living rooms.

In the process, considerable diversity is emerging in these living rooms (far more than secular liberals are willing to acknowledge). To quote Gladwell again:

Scratch the surface, and the appearance of homogeneity and ideological consistency disappears . . . . The members of Warren’s network don’t all dress the same, and they march to the tune only of their own small group, and they agree, fundamentally, only on who the enemy is. It’s not an army.  It’s an insurgency.

Which brings me to al-Qaeda. John Robb posted “The Bazaar’s Open Source Platform” almost a year ago on his blog discussing the implications of the disruption of al-Qaeda’s hub of operations in Afghanistan and the evolution of an even more distributed virtual network behind the guerilla war in Iraq.  He makes the case that this virtual network is pursuing many of the same principles outlined by Eric Raymond in The Cathedral and the Bazaar, one of the inspirations behind the open source movement.

Now that’s a pattern – from the Sunni strongholds of Iraq and the Afghanistan-Pakistan border (not to mention working class neighborhoods in British and German cities) to the living rooms of affluent Orange Country, we’re seeing loosely coupled networks surface as spearheads of social change. I certainly have no intention of equating Islamist guerillas with evangelical Christians.  My point in fact is that remarkably diverse movements inspired by deep religious conviction are embracing similar models of organization.

The patterns on this edge map to patterns on other edges that are more directly relevant to business executives, including the emergence of global process networks reshaping the creation and production of goods as diverse as khaki pants and digital still cameras. People are also becoming more involved in the production and creation of the items that are most meaningful to them.  At the same time, these production and creation activities are becoming far more distributed, even on a global scale.  New ways of organizing are creating the potential for significant scalability, flexibility and innovation as well as much deeper relationships with participants. Companies need to figure out what these developments mean for them, both in terms of how they organize their activities and how they build relationships with their constituencies.