Imagine what would happen if pharma players directly invested in better hospitals and clinics -- instead of in trying to own the relationship with doctors, and furiously outspending one another when marketing blockbusters.
Imagine what would happen if Wal-Mart invested in town squares and parks -- instead of just in featureless warehouses draining what little vitality remains in already bleak exurbs.
Imagine what would happen if P&G and Unilever invested in people's opportunities for education, global mobility, and meaningful, authentic relationships with others -- instead of just trying to control distribution channels, and then push-market more stuff to you.
That's a radically different vision for a better kind of business. One where the value that's created is authentic, durable, and meaningful to humans; one where your "unfair advantage" isn't simply just the flipside of my disadvantage; one where that illusion no longer narcotizes an entire economy.
Hopelessly naïve - right? Wrong. Today's revolutionaries are already bringing this vision to life, and using it to topple yesterday's most powerful and privileged incumbents. Radically better is not just what business must - and will - become: it is what business is already becoming.
Who's breathing life into this vision? And why should anyone do so - isn't it irrational for companies to make moves like those above?
Consider Google's recent release of Chrome, its own open-source browser - and how Chrome is going to help Google discover how to redefine advantage.
There's much debate about Chrome. Is it a platform, an OS of the future? Yes - but not one that yields orthodox advantage - because anyone can copy it. Is it just raw technology, that will make the web faster, safer, richer? Certainly - but technology itself is quickly commoditized.
Chrome feels bigger, more vital, more important somehow. So what is Chrome - really? Chrome - behind the economic veil - is something as radical as it is disturbing to incumbents still playing the tired games of orthodox strategy.
Chrome is a shared resource that ensures the sustainable growth of a larger ecosystem. There are two key words in that sentence. The first is shared. Google is investing in a shared resource because it has the potential to expand the pie dramatically for all, and so Google stands to benefit more than by hoarding it. The second is sustainable growth: through Chrome, Google ensures the ecosystem stays a level playing field, amplifying incentives for innovation, quality, and productivity.
Chrome lets Google play a market creation game. The game Chrome lets Google play isn't about winning market share. It's not about dominance "over" Microsoft. Rather, Google is using Chrome to alter the basis of competition entirely.
The point of Chrome is to utterly explode the boundaries of yesterday's market - and let everyone compete to serve richer and more relevant ads across an open market for lightweight, remixable, low-cost apps distributed nearly frictionlessly. Now that's revolutionary - and that's just the potential of a single revenue stream.
Chrome takes Google from core to edge. Chrome isn't about building and strengthening core competencies, but edge competencies: competencies shared with others. The more Chrome - remember, it's open source - is hacked, remixed, and tweaked, into still better browsers, engines, and plug-ins, the less Google itself has to invest to explode the utility of the entire www itself for everyone.
Stop for a second and think about those economics - because they have the strategic force of a supernova behind them.
Let's connect the dots. Why did we begin by discussing a future where Ford, pharma players, Wal-Mart, and P&G all invested in shared resources? Because that's exactly what Google's doing with Chrome - and then it's using those shared resources to create new markets, instead of contest old, tapped-out ones, and build flexible, powerful edge competencies, instead of rigid, stifling core competencies. Those are next-gen economics - and it is those new economics that can only be tapped by a better kind of business.
Rethinking and rebuilding business in a radically better mold is the fundamental challenge today's boardrooms face. It is what the 21st century demands. Because as a confluence of crises tells us, tired, rusting, obsolete industrial era business as usual cannot go on.
Yet, making business better isn't about responsibility, altruism, or justice - it is the single most significant strategic opportunity today's boardrooms can seize. Google's series of revolutions tell us that it is when we forget how business is and has been - and instead, focus on what business can be and should be - that we can rediscover and reignite new paths to advantage.
So where do the rest of us start? Here's a single, simple question.
Where is the Chrome in your strategy? What shared resource have you invested in - or should you invest in - to expand the pie sustainably for everyone over the long-run?
If the answer's "none," it's likely that you're living on borrowed time. Because Chrome is a textbook example of asymmetrical competition. You don't need to invest billions to disrupt industries with shared resources - a few million devoted to a handful of bright people will do. What Google did with Chrome, tomorrow's revolutionaries will inevitably begin doing across industries - that's why asymmetrical competition is so dangerous and so difficult to fight.
For now, let's discuss - fire away in the comments.
Also See:
How do we make sense of this? Why do Facebook's elaborate games of platform strategy seem to be destroying value, while Apple's platform anti-strategy promises to explode the boundaries of value creation in an industry where those boundaries have long been held to be fixed and immutable?
Yesterday, we saw platforms as mechanisms to strategically control complements. Strategists and economists studied platform wars intensely - with Annabelle Gawer and Michael Cusumano's excellent Platform Leadership being perhaps the reference work for strategists.
Today, I think there's perhaps a simpler and more powerful way to think strategically about platforms.
Let me advance a simplifying proposition: platforms are markets. The most useful way to think about platforms today is simply as markets.
The App Store's name is revealing: it tells us that Apple doesn't see a platform to be manipulated, but a market to be made. It is that understanding that's at the heart of Apple's furious domination of the mediascape.
Markets - and networks, and communities, as I've discussed - are strategic weapons of shock and awe. Why? Here are three ways in which they radically alter the structure and dynamics of entire industries.
Markets alter the basis of competition. Apple took something terminally closed - the mobile value chain -and pried it radically open. Facebook - still thinking in yesterday's terms - took something radically open - the www - and is trying to make it a little bit more closed.
Apple took something radically evil - the mobile industry - and is making it a little bit more good: finally, now that it's usable, there's an incentive for you to get stuff that's actually useful on your phone, instead of just being a zombie whose head is getting ripped off by suits scheming up hidden charges in boardrooms.
Facebook - still thinking in yesterday's terms - took something radically good - the self-organizing incentive for people to share knowledge with others on the www - and is making it a little bit more evil: exclude people from accessing it, trying to pollute it with ads, subvert it with pseudo-friends, silo it across mini-networks, dilute it to the point where low-quality apps proliferate like weeds.
Markets cause strategic domino effects. Markets are strategically radical: once the basis of competition has been altered, an economic tsunami is unleashed, often unstoppable. The dynamics of competition shift irrevocably. In mobile, for example, Apple's market driven approach has each player striving to be more open than the last.
Markets atomize the value chain. The App Store is radical, ultimately, because it atomizes the value chain: where once a handful of scale-driven players could produce and distribute mobile apps, today, any number of players can enter. What was once monolithic is shattered into a million pieces. If the market can coordinate those millions of pieces effectively, the new value chain is hyperefficient. The industrial era DNA of incumbents simply can't fight that kind of radical fragmentation: it's too slow, dull, unimaginative, and evil.
Ultimately, Apple is playing a textbook game of next-gen strategy: using markets to alter the basis of competition, topple incumbents with domino effects, and atomize the value chain. Incumbents playing by yesterday's rules are trying to fight a limit break with a spoon.
Facebook is doing largely the opposite: clinging to yesterday's basis of competition, signing deals with incumbents instead of toppling them, largely failing to atomize media - unless it's for zombies, vampires, and werewolves. Too often, that's where platform - instead of market - thinking leads.
What would it take for Facebook to stop thinking platforms, and start thinking markets? Well, simply start charging people for apps, for a start: that would amplify incentives for crappy apps to go the way of the dinosaur. If advertisers are subsidizing apps for people, Facebook's market will always be distorted - because advertisers need consumers more than consumers need advertisers today.
The understanding that platforms are markets is one of the most vital differences between revolutionaries and laggards across today's strategyscape. Who else knows that platforms are really markets? Google, of course. Who's blind to it, and still plays by yesterday's rules? Microsoft, AOL, Yahoo. But that's just a start: the most interesting examples come from players outside tech industries altogether: Ford, the Gap, and Bear Stearns, to name just a few players trapped by platform logic.
This conclusion also helps us answer another critical question on the minds of today's investors, entrepreneurs, and would-be revolutionaries: when will today's crop of startups start making serious cash? The answer: when they shift from platform logic to market logic.
That's a subject for another post (or maybe a book :) - for now, let's discuss. Is platform thinking holding players back - are there players who are still using platform thinking to great effect? Who do you think who should be thinking in terms of markets instead of platforms? Where else do you see players shifting from platform thinking to market thinking?
Unfortunately, the IPO window is closed - especially for players as seemingly lost in the wilderness as Facebook is. Where does that leave Facebook? A peculiar -- but not unlikely -- outcome may simply be a transfer to private equity. That's a restructuring or turnaround by any other name.
Alternatively, I might put my money on a Viacom acquisition: after a decade of dumbing down nearly all of its once awesome assets, teenagers are increasingly lamed out by me-too value propositions. But they're hanging out on Facebook in droves.
I don't want to bang on about it - I've raised the spectre of poor management at Facebook too many times already. So take the floor and fire away - what's the next step in the evolution of Facebook?
]]>That's a deceptively good question -
because there's a deeper issue behind it. Today's corporate picture looks
darker and bleaker than ever. And especially among those of us in our 20s and
30s, the feeling that business as usual cannot go on is growing.
Innovation is premised on force-feeding people more junk; on fuelling artificial needs for super-size meals, Hummers, and a new pair of sweatshop-produced fast-fashion jeans every weekend.
Sustainability, on the other hand, is premised on helping people finally step off that creaking treadmill of consumption.
Is sustainability the long-overdue nemesis of the innovation fever that’s gripped boardrooms for the last decade – and led to a banal consumptionscape of gewgaw-filled warehouses littering asset-stripped suburbs? Conversely, is sustainability just a crutch for players – like Wal-Mart –can’t innovate in the first place?
Or can sustainability drive a better kind of innovation?
Let’s discuss – and no flip answers please. These are tough questions – let’s think seriously about them (last week’s discussion might be a good point of reference).
]]>What are the contours of that broader crisis?
We’re not just addicted to cheap oil, as Tom Friedman and Al Gore have eloquently argued. There’s a deeper economic truth at work here.
We’re addicted to consumption.
Let’s re-examine the house of cards that is the global financial system. Emerging markets seek export-led growth: they undervalue their currencies, so their exports are more competitive purely in terms of price. That’s essentially a subsidy to consumers on the other side of the table – those in the developed world. As emerging markets accumulate surpluses, they recycle them: they lend them back to the US and UK in the form of government and mortgage debt, stabilizing their economies, and amplifying the existing consumption subsidy through leverage.
Amplifying that artificial cheapness is the simple fact the true costs of production haven't been factored in - until now: very real costs like pollution, community fragmentation, and abusive labour standards.
So we’ve been able to consume mercilessly and remorselessly – with no regard for the human, social, or environmental consequences, to us or to others.
It’s not just cheap oil we’re addicted to: it’s cheap everything. And the world we’re entering isn’t really of Peak Oil as it is one of Peak Consumption.
But consumption wasn’t the only choice we could have made. We could have chosen, instead, to invest. In what? In anything: anything would have been a more sensible choice than naïve consumption – education, energy, healthcare, transportation, even a more sensible and rational kind of finance.
Why didn’t we? Part of the reason is surely deregulation. But a larger part is strategy itself: our economy is built on firms whose very purpose is to sell; to relentlessly push people into endlessly consuming, without ever considering the long-run consequences.
In a world where consumption itself must slow, the boardroom faces tough choices. Does it continue to hawk stuff that “satisfies” largely artificial needs? Or does it choose to do something authentic, meaningful, and purposive – something that makes us all radically better off than we were before?
Do we need razors with ten blades – or a single blade that never dulls?
When the economic history of the early 21st century is written, I suspect it will read something like this. Emerging markets – and the people that broke their backs in them – lent the developed world tremendous amounts. What did the developed world do with it? Instead of investing it in tomorrow, they spent it on McMansions, Hummers, and strip malls.
And that leads us squarely back to strategy: because the addiction has left us strung-out.
At the heart of next-generation advantage is, paradoxically, being able to break yesterday’s maladaptive consumption addiction – not fuel it. It is firms who can shift past nihilistic, meaningless industrial-era corporate purpose – beyond acting as mere pushers of an addiction – who will power the next global financial system.
Companies like this are tomorrow’s revolutionaries – companies, as tiny and fumbling as their steps may be, as diverse as Whole Foods, Threadless, Google, and Marks & Spencer.
Let’s track down more companies that are living this set of next-generation economics already. Fire away in the comments and suggest some – or fire away with questions, challenges, and your own thoughts.
]]>If Chinese demand isn't fueling food inflation, what is? Lol - the real problem is that today's markets are no different than yesterday's.
Business needs to think about ideas like good and evil. Here's another example why.
DNA, market microstructure, and how not to run the global economy.
If you must be evil...at least do it well.
Asymmetrical competitors in finance, read this - and then get to work. That level of inertia is an amazingly rich target - talk about being stuck in yesterday.
“Who else is going to lend to them?”. Perhaps the problem is that the world's most productive economies have been bailing out banks for almost three decades now.
Why is the IPO window closed? There are tons of reasons, but I don't this is one. Yet another point of weakness in yesterday's DNA.
You know, sometimes it's worth remembering just how exuberant irrational exuberance was...exactly a year ago.
This is what the future looks like: new DNA powering authentic economic growth, not the illusion of growth. Do not miss.
]]>Does Apple suck at services - is Apple just a product player? Products and services require fundamentally different kinds of innovation - so should companies stick to their knitting when it comes to innovation?
Discuss away - because we'll be discussing the different kinds of innovation shortly.
]]>Bonus reading: how next-gen markets might just save the world.
]]>So I've decided to use this blog to open-source my daily notes a little bit. The point is for us all to be able to make better sense of the discontinuities that confront us.
As time permits - hopefully every couple of days - I'll be posting the articles, essays, and blog posts that have made me think the most, and try and draw out the themes that emerge from them. I hope you enjoy it - please fire away in the comments and let me know what you think.
***
What markets aren't: the lumbering contraptions grinding to a halt on Wall St and in the City of London. What markets should be:
"Consider Wilfred Mworia, a 22-year-old engineering student and freelance code writer in Nairobi, Kenya...the iPhone doesn’t work in Nairobi, and Mr. Mworia doesn’t even own one. He wrote his program on an iPhone simulator...“Even if I don’t have an iPhone,” Mr. Mworia says defiantly, “I can still have a world market for my work”.
See the point? It's simple. Real markets create authentic value. The Death Stars at the heart of our economy are more like anti-markets, where value is destroyed. How much value destruction has taken place? Here's a conservative estimate, in case you missed it - and that's just the first-order effects.
Facebook guys say: “We are not going to help you close a deal, but Facebook is a social utility that is relevant in many contexts, including business...As you get older, there is this huge tapestry of your life, with many inflection points from where you went to school and the jobs you had, and as more and more people connect with you, it rapidly increases the utility."
Ummm....let me translate. Facebook has no purpose: the more doublespeak you have to engage in, the less purpose you have (and the less facelifts matter).
Surprisingly good Daniel Gross article comparing the Fannie + Freddie meltdown to the (financial end) of the New Deal, and the formation of the FDIC. That's how the US insured it's citizens against Wall St last time...which in itself speaks volumes: the true costs of business are insurance against business.
Yes, the parallels between the emerging macro crisis and the Depression are pretty massive, as I've been pointing out for the last few years.
Will the profit motive undermine trust in Truste? Lol - awesome question from Saul Hansell. Let's supersize it: like anyone trusts anyone anymore anyways - that's the real problem at the heart of the failing global economy.
As I pointed out last week, the Fannie + Freddie is essentially the climax of the macro crisis - it's a de facto sovereign default of the US. Here's some discussion at Alphaville.
Is there any point to b-school research? Wrong question - but the article referenced by Anthony Hopwood is an excellent one.
And I think he's exactly right: business academia has become less about new ideas than about old debates about old ideas - and perhaps it's exactly those old ideas which have gotten us into the mess we're in.
For example, here's the FT talking about the paradox of hiring mavericks - an old, lame and stale debate: it's the same old saw about the star trader who can make you billions, but also cost you billions.
Look - that equation doesn't make someone a "maverick". Your friendly Wal-Mart greeter can also cause damage commensurate with the amount of resources he controls - ie, he can shoplift a few pairs of jeans. The guys behind this crisis aren't mavericks in the slightest - they're the opposite. They followed the dollars with the myopia and rational irrationality of robots.
Real mavericks would have seen the inevitable endgame of selling everything out, and worked against it. So where were they? The point, I think, is that the industrial economy kills real mavericks dead.
For example. Predatory lending - even by the FDIC (lol). Why? Isn't that what competitive advantage is? Predatory? Read that article - because it makes it clear just how deeply the anti-ideals of predation and opportunism are wired into industrial era DNA.
Those are the goals our economy works towards - even in terms of market microstructure. For example, Willem Buiter asks:
"Is there something obviously distortionary or market-abusive about me entering into a contract today to deliver a stock at a known price one week from now without me owning the stock today or borrowing it today and holding the stock for another week?"
I think there just might be: it distorts the relationship between shareholders and management. Any incentive shareholders might have had for value creation in the long-run vaporizes (with predictably perverse results). If shareholders aren't in it for the long-run, what's the point of equity? There isn't one: the edifice begins to crack.
If we're really going to argue that short selling is healthy because it aids price discovery, we must also ask: where was this so-called price discovery for the last decade? Why does short selling as price discovery only work when crises accelerate? Conversely, if yesterday's price discovery is meaningless tomorrow, perhaps the real problem is that the institutions we've built aren't adequate for a hyperconnected world.
That's why the crisis, ultimately, is in the DNA.
It's fascinating to read that many still argue the orthodox perspective:
"A stockmarket is a mechanism of price discovery and should be regulated only with regard to the accuracy of numbers and facts."
Really? Maybe in a textbook - in the real world, today's so-called stock markets are more like mechanisms of information manipulation with almost zero accuracy in terms of "numbers and facts". So perhaps if we focused a bit less on the numbers, and a bit more on the logic, we'd have morepower to understand what's really going on.
What's really going on? In a world of marginal resource scarcity, the value of efficient resource allocation is going to explode.
But can we really trust markets as we know them to allocate resources efficiently anymore? Especially when the only jobs that pay are those that have mostly to do with, well, making markets fail?
Tough questions for tomorrow's radical innovators (hey - it's not like you have anything better to do, right?).
]]>The macro crisis is entering it’s next to last – and perhaps climactic – phase: the true costs of business as usual must slowly be grappled with. As Fannie Mae and Freddie Mac melt down, it is taxpayers who are bailing out shareholders - the Treasury is now reduced to intervening directly in the financial markets: so much for hundred of years of laissez faire economics.
Why are Fannie and Freddie being bailed out? Because they must be. As Brad Setser has pointed out, much of the debt they ensure is held by emerging markets like China and Russia. If Fannie and Freddie fail – or have to be nationalized – the ultimate cost will probably be essentially a massive, destabilizing to sovereign risk: a downgrading of the credit rating of the US.
Unfortunately, the US is for all intents and purposes bankrupt anyways. So that outcome is unavoidable now: it will just happen via a different mechanism: the dollar will continue to slide, rates will spike, consumption must flatten, and investment must erode.
Grim reading. But what does it have to do with strategy?
Everything. Here’s a radical proposition: strategy itself is how we got into this mess. When everyone acted "strategically", the financial industry imploded".
Consider this. Why did everyone – literally every single player in the financial value chain, from mortgage brokers to prop traders – compete mercilessly to hoard benefits, and shift, hide, and obscure true costs? That’s what ripping the other guy’s head off really is, after all.
Because it’s exactly what orthodox strategy teaches us to do. In fact, that’s the very definition of market power: the ability to allocate costs and benefits regardless of the preferences of others.
Perhaps the meaning of competitive advantage, when all the games have been played and the gears of the economic machine have finally stopped moving, is this: privatize benefits and socialize costs.
That might have been sustainable in a disconnected, asset-heavy industrial economy. But it cannot hold in a hyperconnected edgeconomy. When all of us can trade ten billion times a day, if everyone’s simply trying to claim benefits from everyone else, while shifting costs and risks to everyone else, the result is economic implosion.
In an edgeconomy, chasing competitive advantage is like playing a game of economic musical chairs – one where you leave a grenade on your chair every time the music starts up again. Sooner or later, everyone gets blown up.
The problem is simple. As we’re finding out the hard way – yesterday’s approaches to strategy simply cannot power the economies or businesses of the 21st century.
So the question is: how do we save strategy?
The real change must happen in the DNA: how firms and funds are organized and managed. Here's one place to begin: three fundamental errors industrial era DNA leads today’s boardrooms to make, over and over again.
Strategy isn’t arbitrage. What happened in finance? Everyone confused arbitrage with strategy. But arbitrage is simply about capturing value at the expense of counterparties: no new value is created by arbitrageurs. At the limit, arbitrage devolves to a negative sum game: I will actively poison your opportunities, and you will poison mine, if we are trying to arb one another. Strategy must be concerned with value creation in the first place.
Strategy isn’t dealmaking. Too many companies fall prey to the cult of the deal - Viacom, TimeWarner, Sony, Yahoo, Citigroup, and Bear Stearns: that’s just a tiny list. Deal-making is a powerful narcotic when equity is the currency execs are paid in, and the pushers behind the deal have zero interest in the health of the addict. Yet, despite the flawless pitchbooks of investment bankers, strategy isn’t deal-making. That strategy is concerned with value creation means strategy is about how resources and competencies will fit together tomorrow, not just how many costs can be shared between business units today.
Strategy isn’t an arms race. As Michael Porter has tirelessly pointed out, strategy isn’t about arms races, where we strive to do the same things as everyone else, just a tiny bit more efficiently. It’s about making choices which lead to sustainable differences. In finance, for example, the industry became obsessed with algorithmic models – but those models were remarkably similar. Little surprise, then, that so many were vulnerable to the same discontinuity.
What is strategy? It’s simple: strategy is what’s strategic – what is in your long-run best interest, factoring in everyone else’s long-run best interest.
Let’s go back to finance. Was it really strategic for boardrooms to invest billions in assets whose valuations were totally abstracted from reality – and even when the valuations were reasonable, the information fed into the valuation was deeply suspect? Is it really strategic for the world's resources to be allocated more and more in dark liquidity pools by opaque, closed, myopic funds designed to be unaccountable?
I don’t think it takes a great deal of insight to understand why such a financial system is unsustainable, in the deepest sense of the word.
Fire away in the comments – do you see the link between strategy and the macro crisis? Do you think strategy itself played a role? Or is 20th century strategy just as valid as it ever was?
And for those of you who are interested – the title of the post is, of course, an homage to Rajan and Zingales’ thoroughly awesome Saving Capitalism from the Capitalists.
]]>Can you think of instances where Google has violated this principle? Is Google becoming more evil as it attains more market power? Is the relationship between market power and evil set in stone - will Google inevitably become evil, because that's what happens to companies (and people) as they grow up?
Fire away and let's discuss.
]]>Maybe not.
Here's the big question no one’s asking: does it matter who Microsoft buys? Let me advance a countertintuitive proposition. From a strategic point of view, the answer is: no.
Why not? There's an existence proof the size of the Grand Canyon staring us in the face. Consider Microsoft's would-be victim: Yahoo. Yahoo spent the last five years acquiring vast swathes of the most promising startups around: everyone from Flickr, to del.icio.us, to RightMedia.
Smart moves, right? Nope. Not one of these acquisitions managed to alter Yahoo's long, slow slide into profound strategy decay - if anything, they only accelerated Yahoo's decline. What went wrong here? Why did orthodox strategy - acquiring tomorrow's growth platforms - not just fail, but lead to a spectacular value implosion?
For Yahoo, these acquisitions weren't ways to experiment with new DNA, but simply roads to shore up orthodox sources of advantage. For example, Yahoo invested heavily to build a brand - Google, as we know, didn't. And Yahoo focused on scale: until recently, it had greater traffic than Google - and its investments and acquisitions were premised on eyeballs.
Yet, the more Yahoo focused on orthodox sources of advantage, the less it could focus on new DNA. Here's an example: Stewart Butterfield's bittersweet resignation letter from Yahoo, which makes glaringly clear how Yahoo, time and time again, focused on orthodox, industrial-era strategy over fresh DNA.
Now, in an irony worthy of the Daily Show, Microsoft's making exactly the same error. It’s hell-bent on acquiring Yahoo, and its premise is exactly the same as Yahoo's was: to attain orthodox sources of advantage.
Yet, Google squashed Yahoo like a bug by focusing not at all on orthodox sources of advantage. Instead, Google focused on new DNA: on listening, instead of talking, on good, instead of evil, on openness, instead of closure - etc.
Now, certainly: we can argue how closely Google really adheres to these principles – but that’s a different argument. The point is that these principles redrew - exploded, in fact - the boundaries of value creation for Google.
See the error - the one that the would-be master of the universe in Redmond can't see? It's this: in acquiring Yahoo, Microsoft is making exactly the same mistake Yahoo did to begin with.
Though it looks like an epic battle, it’s more a case of history is repeating itself. Redmond is trying to compete with new DNA by acquiring orthodox sources of advantage – scale and relationships in search and advertising. But the entire story of Yahoo's Technicolor meltdown contradicts this approach totally and decisively.
Here’s the single, simple lesson. Microsoft’s battle for Yahoo is a case of asymmetrical competition in reverse: Microsoft is competing on yesterday’s terms. Instead of using new DNA to revolutionize deeply troubled media and technology industries, Microsoft is simply buying more resources to plug into yesterday’s DNA (here’s a visceral, hilarious example of how damaged that DNA is, courtesy of Bill Gates himself).
But recent economic history – in fact, the very history of Microsoft’s acquisition target – tells us that taking on competitors with radical new DNA by acquiring orthodox sources of advantage is about as smart as trying to take down Voltron with a wet towel.
Today, advantage is, to use an unintentionally ironic metaphor, in a company's operating system - not in its hardware. Advantage begins in the DNA. It's a function of the principles you use to organize and manage - not in what assets you own, what capabilities you have, or how many monopolies you had yesterday.
That's why it's likely to be irrelevant who Microsoft buys, who runs Microsoft, what services Microsoft launches, or what moves Microsoft makes. The endgame is already written - into Microsoft's industrial-era DNA.
That’s why, in fact, the more acquisitions Microsoft makes premised on yesterday's sources of advantage, the surer its ongoing slide into strategic irrelevance will be.
Fire away in the comments - do you see the strategic error Redmond's making? Do you think acquiring Yahoo will give Microsoft the market power it's searching for, or revitalize a decaying strategy?
]]>Unfortunately, because my mom is ill, I couldn't make it (I'm really sorry, Kevin). That sucks massively - because I've been looking forward to it all year.
So here's a short summary of the talk I was going to give instead. To get the most out of it, I suggest reading my guest post at Leading Green on new DNA first.
***
21st century capitalism needs a revolution. How does growth happen - from a strategic point of view? The great Joseph Schumpeter argued that growth happens through a process of creative destruction. There's a simpler word for that: turbulence.
I think there's a problem with this thesis. In an interconnected world, there are more and more players creating and destroying - as a simple example, the pool of workers in export-oriented industries has tripled, from 300 million to about 900, over the last 20 years. And so, today, turbulence is intensifying.
Creative destruction has two sides - the costs of destruction as well as the benefits of creation. And as creative destruction intensifies, the costs of this great tradeoff are going to sharpen. The price of growth, it seems, is a world that's always riskier, more uncertain, and more brutal at the margin.
I think that accepting this tradeoff, perhaps, is the single most toxic orthodoxy that holds boardrooms back today. Why? The problem is that value creation isn't just about productivity gains: it's also about human welfare.
Consider this. When the last bubble was in internet technology, welfare was minimally affected - jobs were lost. When it shifted to housing and credit, welfare was affected more - houses and saving were lost.
Today, it's shifting in large part to energy and food. What happens when hypercapitalism causes a food bubble? What happens when the masters of the universe in Greenwich bid up the price of food for India, China, and Africa's huddled masses?
Here's the answer: marginal starvation. Lives are lost.
That's the very real toll that creative destruction extracts. It's the price that a better food industry tomorrow demands of us today.
If that's 21st century capitalism - maybe it's time for a revolution. One where the price of a dynamic economy isn't relentless damage to everything and everyone else.
The invisible hand is crippled. What's going on here? Wasn't the invisible hand supposed to raise everyone into prosperity and well-being?
Yes - but it's not. The world is getting phenomenally richer - but the costs of that wealth seem to be endemic poverty for vast swathes of the world's population, the poisoning of the water we drink, the pollution of the air we breathe, and the fraying of the social and cultural fabric that binds us together.
We're richer, but that wealth doesn't reflect durable, authentic economic value - which is hitting fast diminishing returns. The growth that we're pursuing is neither sustainable - nor is it, in many ways, real growth at all. Boardrooms from finance to autos to energy to pharma to fashion have learned that the hard way.
Growth is in the DNA. So how do we begin rethinking economic growth? With the understanding that technology alone isn't enough - and in fact, it's not the harder part of sustainable growth.
Even if we invent a magic energy or food source tomorrow, it does the world little good if it's in the hands of a Bill Gates 2.0 - the amount of new value that's created is minimized. Conversely, it also does us little good if it's in the hands of a Ford 2.0, who'll just push-market next-generation gas guzzlers that put us squarely back into an energy trap.
The real problem is that the industrial economy is riddled with incentives to rip your head off, sell you lemons, maximize so-called "profit" at all costs, and exert power against you - not for you. That's why it seems that pain, suffering, and value destruction are deeply embedded in the very DNA of our rusting, industrial-era economic system itself.
And that means that though technology is necessary, it's not sufficient. What's harder - and what truly unlocks new value - is new DNA. The fundamental question new DNA must answer is this: how do we organize and manage resources so they're not depleted, crushed, strip-mined, and slashed-and-burned?
It is players who can answer that question - players who can renew yesterday's rusting DNA - who will be able redraw the boundaries of value creation in the 21st century.
Organize something. Why does Google insist that it's goal is to "organize the world's information"? Because it's figured out one of the deepest secrets hidden at the heart of 21st century economics: markets, networks, and communities can organize economic activities radically more efficiently than firms.
How do we begin reorganizing the industrial economy? By using markets, networks, and communities to alter the way resources are managed: to weave a fabric of incentives for sustainable growth and authentic value creation into the economy - a new economic fabric that's meaningful to people.
Google utilized a market - AdWords - to utterly eviscerate a stale, broken media value chain. Here's a more visceral example. Muhammad Yunus revolutionized finance - not by collecting more money to lend, but by using communities to fundamentally alter the value equation of lending to the poor. The result was industry transformation.
See the similarity? Two vastly different industries - finance and media - were both revolutionized by new DNA. It was new ways to organize and manage that exploded the boundaries of value creation.
The revolution needs revolutionaries. Today's investors, boardrooms and entrepreneurs are looking for value in all the wrong places. Facebook's game of musical chairs won't solve big economic problems - and neither will making token investments in greentech.
Where is the next industrial revolution crying out for revolutionaries? Simple: in industries dominated by clear, durable, structural barriers to efficiency and productivity.
The next industrial revolution begins here. What happens when we think of using new DNA to reorganize structurally inefficient industries? A blueprint for the next industrial revolution emerges. Here's what it looks like.
Organize the world's hunger.
Organize the world's energy.
Organize the world's thirst.
Organize the world's health.
Organize the world's freedom.
Organize the world's finance.
Organize the world's education.
That's not an exhaustive list - it's just a beginning. In fact, let's open source it: please add to it ("organize the world's xyz"), and we'll keep an index here or elsewhere.
What's important is the logic behind the list. Let's make that as razor-sharp as possible.
Organize: to transform DNA, not lower-value technology. The world's: to have a global impact; to be able to scale to global levels. Hunger, health: some measure of economic well-being: to radically change the world for the better.
If you're a startup, and your elevator pitch isn't shaped by this blueprint; if you're an investor, and your portfolio isn't full of companies like this; if you're a corporate boardroom, and you're not refocusing and restructuring to meet these new challenges - here's the bottom line: the next industrial revolution has your name written all over it.
***
Regular readers might have noticed that this talk is also a follow-up to my Open Challenge to Silicon Valley post. Fire away in the comments and let's discuss one or both.
Click here to view Umair Haque's video response to your blog comments.