Monday, November 21, 2011

Spotting the Next generation ...

For the best part of a decade I've worked on how business activities evolve from genesis through to products to commodity. As activities evolve then practices (such as management methods) that are applied also have to change which is why one size never fits all.

I've also demonstrated how this process of evolution creates a cycle, with commoditisation enabling further genesis (as in innovation of new activities) and the importance of inertia barriers in regulating this cycle.

These cycles also appear at the macro-economic scale and they're known as Kondratiev waves, however even more localised cycles (i.e. specific to an industry) tend to be associated with organisational change.

Hence with the commoditisation of the means of mass communication (i.e. the internet), new forms of organisation appeared known as Web 2.0. These companies had different activities, practices, strategies and structure to the more traditional, enterprise organisations that existed before.

In general terms, this cycle of evolution and its interaction with inertia barriers creates three economic eras - peace, war and build. During the peace era, sustaining change is particularly high, companies fight to maintain their relative position and inertia barriers to change help support the status quo.

The war era occurs when an activity evolves from one state (such as products or rental services) to another (such as commodity or utility services) and during this time disruptive change dominates whilst inertia barriers become a hindrance to survival. Companies literally are fighting to survive, often against their own internal culture and inertia to change.

So during the last IT war, caused by the evolution of the means of mass communication, these new web 2.0 organisations formed and the rate of disruptive change was high. Those traditional, more enterprise like companies that were impacted but survived the war had adapted and learnt many of the lessons of web 2.0. Today, social networking, social media, rich internet applications are the norm.

However, cloud computing - which is nothing more than the evolution of a wide range of activities from products (and rental services) to commodity (and utility services) - has initiated a new era of war.

The models predicted (and this is what we found) that there are three main forms of IT organisation in the wild - the traditional enterprise who have adapted, the web 2.0 players and a new breed of Next generation companies. The practices, activities, strategies and organisational memes of these Next generation are the ones which will tend to diffuse and dominate our industry.

The underlying framework, models and principles of how this works is part of a report I'm finishing for the LEF. Including in-depth surveys of over a hundred companies, it provides a reasonable hypothesis of organisation evolution across activities, practices and strategies. I say reasonable because it's more than postulation as there is data that demonstrates the pattern but this is not peer reviewed, the sample sizes are small and hence its only a reasonable hypothesis and requires a good dose of scepticism.

I'm not going to go through the report but I thought it might be useful to just comment on how to identify the Next generation in general terms.

If your organisation :-
  • embraces change and is acutely aware of inertia barriers
  • has primary goals based upon disruption of existing markets and growing ecosystems rather than a focus on profitability and growth into emerging geographical markets
  • views commoditisation not as a liability but an opportunity
  • operates through small, highly empowered teams building and creating services
  • builds and exploits ecosystems by enabling others to build upon its services
  • uses data analytics rather than metrics to determine action
  • continually challenges and removes processes
  • understands evolution and avoids one size fits all mentality
  • builds distributed systems designed for failure that use commodity IT where possible
  • considers itself to be as, if not more, efficient than Amazon
  • games behaviour both internally and externally
  • views culture as malleable and focuses on talent density
  • views open source as a tactical weapon
  • is seen by others to be simultaneously highly innovative, customer focused and efficient despite what Porter said on the subject
... then you're Next generation. If this isn't you, you're not. If you're not, then just hope this war doesn't stretch into your industry or that IT isn't a major barrier to entry into your space or this hypothesis is completely wrong.

I've provided a comparison between the traditional enterprise and the next generation in the following table.

Along with retail, media, travel firms and others who have already suffered in the last war - we should see software products & hosting, insurance and retail banking dragged firmly into this one.
Of course, along with this war era comes a build era, a golden age where the genesis of new activities flourishes and we see periods of frenzied growth.

The cycle is continuous, and the next major war after this one should be related to the commoditisation of the manufacturing process itself ... now, that'll be a big one. For me, this is personally important as it creates an opportunity to test the hypothesis.

What we should see as the means of manufacturing becomes more of a commodity (driven by 3D printing, printed electronics and hybrid printers) is a high degree of disruption in manufacturing industries as inertia barriers to change are broken by new entrants whose practices will be remarkably different from the existing players. The practices of these Next Next generation of company will diffuse and become the norm.

If this hold true, then I'll have enough to finally put the work up for peer review - having initial data (covering 4,000 data points), a hypothesis which describes a pattern from that initial data and has been preliminarily shown to exist in this current war through a survey (providing in total over 6,000 data points across 100 companies) and finally a pattern which is predictive.

If it doesn't and is falsified then it's back to the drawing board. The downside is I'll have to wait many years (possibly as much as a decade) before the next war starts ... if only companies were more like bacteria that I could grow in a lab.

Saturday, November 05, 2011

Bye, Bye American dream ...

In the last fifty years wealth inequality has risen dramatically in the US, with real earnings (adjusting for inflation) increasing by 5% at the lower end of the scale and by 700% at the upper end of the wealth bracket. Not that inequality itself is a negative thing, it can spur ambition.

Unfortunately there is a strong correlation and causation between wealth inequality and intergenerational social mobility. Hence around the 1950s-60s, social mobility was around 12% in the US i.e. 1 in 8 of people in that era moved up (and down) a social class. If you were born into the working class around the 1950s-60s then you almost certainly know several people who have made it big, who have achieved the American dream, maybe you're one. Today, social mobility languishes around 3% i.e. 1 in 33.

Chances are that people born today in social working classes will see few of their contemporaries (if any) breakthrough to higher social classes.

In the US today, your future social class is not predominantly defined by your ability but by who your parents are and the opportunities they can provide you. As this spreads, the lack of role models for a change in class should become self reinforcing.

In short, if you're born today to a wealthy family, hey presto ... you're a success ... but if you're born today to a family of police officers (a noble profession in my view) chances of you becoming a CEO of a major corporation are pretty slim, certainly much less likely than it was for those born in the 50s or 60s.

I mention this because a friend made a comment that they thought that the concept of monarchy and class was over. Certainly in the UK we've suffered with poor social mobility and its impact on competition but even our social mobility is now better than the US. If anything, hereditary monarchy is alive, growing and becoming stronger in the US through hereditary financial monarchy. All Hail, the new Kings and Queens.

As for the American Dream, to be brutally honest the last vestiges of this are standing outside Wall Street in a much derided occupy movement. Certainly there will be examples of people who buck the trend (i.e. 1 in 33 or less) and there is always the X-Factor or adoption by a wealthy family.

My only advice is that if you're born into a low social class in the US, blame your parents and learn to curtsey or doth your cap. If your're born into the high social classes, thank your parents, lord it up but watch those peasants - especially when they get hold of pitchforks.

Bye, Bye American Dream ... nice idea, shame it didn't last.

[As an addition : for those who want to learn more on this subject, a good starting point is probably the Applied Economics 2009 paper from Harvard University scholar Dr Dan Andrews on "More inequality, less social mobility"]

Friday, November 04, 2011

Is it time to reset?

Our economy faces unusual challenges due to the exceptionally high debt burden. In terms of Government debt this is represented through Gilts (Government backed securities of debt). The recommended solutions to our problems usually involved manipulation of the money supply in the hopes that somehow this will correct the underlying problems.

For example, in the UK the Government sells debt with Gilts then, through a wheeze known as Quantitative Easing, it prints money to buy back the Gilts it has sold. The net effect is that GBP is devalued (leading to commodity price inflation), the delta between buy and sell price is absorbed as profits by the counter party (normally a bank) and the entire distribution of wealth becomes further concentrated to the advantage of the counter party.

It would in effect be more cost effective (and honest) if Government's didn't sell and buy back Gilts but simply printed money to counter their shortfall. You'd still however be left with the issue of devaluation.

Now in an export led economy devaluation can help boost exports at the same time as increasing inflation. However, we're not an export led economy, so devaluation without direct investment leads to higher material costs, less profitability in internal markets and correspondingly cost reduction, weakening of the internal market, higher inflation and stagnation i.e. what the media call stagflation.

All of these problems are exacerbated by debt, inequality of wealth distribution etc. In the Eurozone we're seeing this shake out with Greece which faces either a decade or more of misery or default on the Government debt (i.e. gilts)

Now, a Greece default would be a disaster because it would be difficult to raise further debt and investors would be wary of trading with Greece. But wait, it's part of Europe ... the EU could always raise debt for it. I suspect this is why people are so keen for Greece to leave the Euro if it defaults. A country that defaults but then continues is not a message the market wants to hear.


Well despite media opinion, Government shouldn't operate for the benefit of investors but society as a whole and Gilts come with risk (albiet relatively small). Now if a country default and continued to operate, then the problem for the market becomes what if this idea extends? So let us extend this Greek idea a bit more. What if every country in Europe and ideally add in the US as well, simultaneously defaults on Government Debt i.e. Gilts and resets the debt to zero?

Well for investors it would cause one hell of a haircut and some banks would probably fail. However, those can be nationalised where necessary and measures taken to limit the damage. You'd certainly need some form of protective measures for those at the bottom end of society - hence tax raises would be necessary - and Government would need to co-operate to smooth out some of the fall-out.

There'd be lots of nashing of teeth, the markets would suffer turmoil whilst they reset but investment (in the case of shares, gilts etc) is always shorter term gambling and despite the losses the size of the EU & US means investment will still continue, possibly even flourish. It's worth remembering that market indices (FTSE etc) are also not a good indicator of the underlying economy despite the media's fixation on them.

I can't see there are actually any real downsides to a Europe and US default (bar the temporary turmoil etc) except for investors but such gambling inherently occurs risk and these are fairly unique circumstances. The Governments could always shore up the economy by direct Keynesian style investment as well.

Naturally, some would argue that this might collapse the USD / EURO / GBP against other currencies such as the Yuan. But the above approach wouldn't significantly increase money supply (other than investors dumping) and the Yuan isn't a free floating currency. Certainly against other countries they'd be possible devaluation but then given the size of the trading blocks the effect should be minimal over time. What about sanctions? Against Europe & the US - don't make me laugh.

Of course, some will argue it would spook investors so much that there'd be a collapse of investment. However, if the money was invested in Government debt it wasn't invested in longer term infrastructural goals which is what we actually need. Any investors sent to the wall would be quickly replaced by others - that's capitalism for you - and as for pension funds, well it's true that we'd need decent protective measures put in place to protect the poorest but beyond that not a great deal more.

I'm writing this because the UK Government is planning to give more taxpayers' money to the IMF who may contribute to the Eurozone bail-out (something which our Gov. said they wouldn't do) or in other words piling on more debt to help solve problems caused by having too much debt.

This is a cycle we need to break. Can I suggest we reset the market economy by resetting Government debt. A simultaneous default by Europe and US on all Government debt should do the trick.

Does this post mean I believe this is the right course of action? Well, unfortunately whilst the idea is interesting, the practice is virtually impossible. In order to exact such a change, the various Governments would need to agree and execute almost instantly to avoid investors dumping Government bonds on the unsuspecting public (or wrapping them up in some other complex instrument). I have doubts that our leaders are capable of such consolidated action. All it would take is one party to phone a friend and warn them to get out of Government bonds and the entire scheme would unravel quickly.

So, overall ... I agree with the concept but the practice is probably too difficult and it's much more likely that we'll settle for many years (or decades in the case of Greece) of austerity

Thursday, November 03, 2011

Ecosystem & Porter

A common characteristic of Next generation organisations (as opposed to traditional) is their focus on ecosystems and the provision of platforms to support their growth. The purpose of such ecosystems is not simply some form of marketing exercise but instead a mechanism for managing the innovation paradox (i.e. the need to be efficient to compete today but also to be creative in order to compete tomorrow).

Consider the provision through an online API of a software system whether it’s SalesForce, Amazon’s AWS or PayPal’s x.commerce platform. These services are core utilities that the organisation is providing with the express aim of others consuming i.e. an ecosystem of consumers developing around the service.

The consumption of the service may represent general use or even novel and more creative uses e.g. the early provision of big data Hadoop systems on AWS. Since the genesis of any activity is uncertain (being chaotic) and likely to fail, then the use of utility services helps reduce the cost of failure and thereby encourages the creative pursuits of others. The larger the ecosystem, the more likely that creative models of consumption and the genesis of new activity will be occurring.

Naturally, if those activities are useful (i.e. Hadoop on AWS) they will spread through the normal process of diffusion. By monitoring the ecosystem’s use of your services this spread can be detected.
These factors enable a model known as ILC (innovate-leverage-commoditise) to be used (see figure below). Through provision of utility services and the development of an ecosystem, you enable others to create new activities at a lower cost of failure and hence encourage innovation to occur in the ecosystem and around your services. Through monitoring, you can leverage the ecosystem to identify novel activities that are spreading. An organisation then can either copy or acquire such activities and commoditise these to create further services that enable growth of the ecosystem and hence further innovation through componentisation effects.

For example, the introduction of AWS enabled others to build Hadoop on AWS. With the spread of Hadoop on AWS, Amazon introduced an equivalent utility service - Elastic Map Reduce (EMR) - which in turn has enabled novel activities to appear that consume EMR. And so the cycle repeats ...

Figure 1 - ILC model (click on image for higher resolution)

NB, I italicise the term innovation because I'm referring to the creation of novel activities i.e. genesis of an activity rather than the broad use of the word innovation which is applied to almost everything from feature differentiation to service provision of a pre-existing activity. See "The Abuse of Innovation"

It’s through models such as ILC that an organisation can simultaneously appear to be :-
  • highly creative - by pushing such uncertain activities to a wider ecosystem
  • customer focused - by leveraging the ecosystem to identify that which is becoming adopted
  • highly efficient - by focusing on commoditisation
In Porter’s terms these Next generation organisations have a primary focus on a cost leadership (a best price) for provision of the utility service.

BUT they also have a strong differentiation strategy which is heavily influenced through creative pursuits of others within the ecosystem that develops around their utility service (i.e. genesis of novel activities being driven outside the organisation). This is why Next generation organisations often cite “enabling others to build upon our services” as criticial.

BUT they also have a strong customer focus strategy heavy influenced by adoption within the ecosystem (i.e. they leverage the ecosystem to identify activities that are spreading) and subsequent provision of these activities as further utility services.

In such cases, all three of Porter's strategies are being pursued simultaneously with the major nuance between these players is whether they use copying (a weak ecosystem play) or acquisition (a strong, reinforcing ecosystem play).

I mention this because "focus on customer, innovation or efficiency" is one of those truisms like "culture eats strategy for breakfast". It's a great sound bite but on closer examination, it doesn't seem to stand up to rigorous scrutiny today. The game has changed.

I'm currently collecting a selection of truisms and each one of them seems to leak like a sieve when exposed to rigorous study. The following are ones which in my view are all in need of serious re-evaluation :-
  • You can't manage what you can’t measure
  • You need to give customers what they want
  • The best way to predict the future is to create it
  • Avoid the commoditisation trap
  • Business has only two functions - marketing and innovation
  • Culture eats strategy for breakfast
  • Focus on customer, innovation or efficiency