Sunday, November 06, 2005

Response to John Seely Brown and John Hagel III's new book, THE ONLY SUSTAINABLE EDGE

John Seely Brown and John Hagel III in their recent book The Only Sustainable Edge
suggest a three-stage future transformation in business (deepening specialization within firms; mobilizing best-in-class capabilities across enterprises; and, ultimately, accelerating learning across broad networks of enterprises). When they do this, however, they come to the limits of what is possible within our current global economic and political system.

It is entirely true that, at present, advantage does come from an institutional capacity to work closely with other highly specialized firms to get better faster. However, long-term, we need, as companies and as society, much more system-wide approaches creating a genuinely "flat" world (in Friedman's terminology) rather than merely a digitally and financially "flat" world, which is what we have at present. A genuinely "flat" world would also be "flat", for example, in terms of environmental and social legislation and infrastructural requirements.

In fact, the first two stages of their "future stages" are already occurring. Beyond their third stage (accelerating learning across broad networks of enterprises), I see the creation of genuine "mega-corporations", which will be the natural and inevitable result of their suggested "learning" phase.

How will these megacorporations be different from old-fashioned conglomerates? Well, conglomerates hold an unrelated portfolio of business for the purpose of balancing potential income over differing business cycles in different industrial sectors, and the reason they generally failed (though let us not forget that there are some outstanding successes such as GE in the USA and Virgin in the UK) was that understanding and experience of one industry does not necessarily enable you to manage another industry. Moreover, having a conglomerate was fine when the various industries in your portfolio were performing as you expected, but the structure of world industry has changed since 1989 and we have seen supposedly counter-cyclical industries converge, so that they have turned sour at very similar times. Since the business cycles have changed and the world has become increasingly chaotic, it is no longer possible with certainty to identify counter-cyclical businesses.

In any case, the essential difference between the old-style conglomerates and the new megacorporations is that the latter will leverage across industries the emerging changes in the relationship between customers and producers on the one hand, and on the other hand between producers and suppliers, producers and marketers, and producers and financiers or investors.

Megacorporations will need to employ very few people and will entirely reconstruct the value chain – again across industries - by providing customers a confidential, convenient, quick, cheap way of getting an extremely wide range of products and services (or indeed ALL products and services) with the assistance of worldwide electronic networks stretching from production to delivery. We can see this already beginning to happen with companies such as Amazon and e-bay. The first of these warehouses products, the second does not since it simply acts as a marketing platform. I think neither model will obtain, but rather a megacorporation model, in which the company handles not only the marketing, warehousing and delivery, but also the manufacture of all its products and services (Amazon has just begun to move in this direction). That Amazon and e-bay are enabled to do reasonably well even in the current world of text-based electronics should persuade us that the tendency to move in the direction of supplying all possible goods and services will be multiplied as video-based electronic nets come into being, and are complemented by networks which are designed to carry Virtual Reality as well. The first move in this direction can just be discerned as Sprint Sprint Nextel announced on the 2nd of November 2005 a partnership with the #1, #2, #4, and #7 cable (MSOs) in the US - Comcast, Time Warner Cable, Cox Communications, and Advance/Newhouse, respectively. Their mutual goal is to offer combined wireless broadband, cable video, and telephone services to consumers in a single package. This is of course not yet a megacorporation, but it testifies to the move to supplying in an increasing range of goods and services. Why is it not a merger? Why is it only a co-operative venture or partnership? Because of the Street's fixation with competences and with "sticking to one's own knitting".

There is much talk of core competences at present, but the Street will soon learn a few basic lessons. A "core competence" by itself means nothing. For example, if I am the world's expert in the structure of the Mongolian language, that by itself may not even enable me to make a living let alone become a millionnaire. The question is always: For what core competences will which market pay how much? So let us think in a clearer way about the core competences which will be required by the best-paying markets in the future. If the megacorporations which I have theorised about do in fact come into being, as I think they will, then it is fairly evident that the core competences of that world will be three principal ones: marketing-related, logistics-related and innovation-related. Anyone who can help in the brand wars which already exist and which will intensify in the times ahead will be worth a lot. So will anyone who can help re-engineer the logistics-chain. Finally innovation will be much in demand, whether it is a rich elite who come to dominate the world, or a more just world for everyone.

In this new world, the new core competences are not going to be along the old lines of industry. The core competences of the future are going to focus on only three areas:
- excellence in marketing (or, rather, excellence in recruiting and
retaining a loyal base of customers);
- excellence in organising and operating an "intelligent“/robotised value
chain; and,
- excellence in innovation (new products, services, ways of
marketing and ways of organising logistics, perhaps
through technological creativity and innovation).

These could form the basis of the "industrial divisions“ of the immediate future, though it is likely that even more genuinely massive mega-corporations will already emerge first, which will integrate such "industry divisions“.

So what are the key competences that will enable companies to survive and flourish? Let us think of that question along the following lines. At present, we are going through another phase in the world economy in which the slogan of the day is "return to roots" or "back to the core". Executives do not seem to understand that, while we built up our present level of success on the basis of our original core business, the current situation does not guarantee survival. One cannot "return to innocence". An angel with a flaming sword guards the way back to Eden! Radically new strategies are needed for our times. The key competence for the future is the willingness and ability to recreate one's company in radical fashion: much bigger or much smaller.

Today, the choice is either to shrink your company down to a suitable niche in order to enable it to continue being profitable, or to integrate existing corporate giants or, alternatively, to build from scratch the chain across industries which can supply a range of cross-sectoral products and services to the customer.

Some people do not and will not believe that this is possible. They will of course never attempt to build such megacorporations. But some people do believe this is possible. Clearly, the people who will attempt to build these megacorporations will come from the ranks of such "believers".

Many such people may fail in their attempts to build these megacorporations. It could be argued that AOLTimeWarner and Vivendi Universal were attempts to create the first such megacorporations and that these attempts have failed. But the point to remember is that just because those executives failed, or some other fail in their attempts, it does not mean that every one of those who tries to create a megacorporaton will fail - many people die in their attempts to scale mountains, but that does not prevent others from trying, and when the first hardy soul succeeds in climbing a particular mountain, he or she not only makes history, he or she reshapes our horizons regarding what is possible and indeed changes our perception of reality. In fact, Dick Parsons, the Chairman and CEO of AOL TimeWarner has recently said that he believes the AOL TimeWarner combination still makes sense and he wants to make it work better as a single corporation.

It is not "politically correct" to speak about "mega-corporations", that is why no one discusses them. The moment anyone succeeds in creating such a mega-corporation, the entire game will change, and we will go from the third stage suggested John Seely Brown and John Hagel III, to my fourth stage of mega-corporations.

In any case, you don’t need many megacorporations to succeed. In fact, not many can succeed. There is room for somewhere between, say, twelve and 25 megacorporations, depending on anti-trust activity on the part of governments. Without that activity, there is room for perhaps five megacorporations in the world.

The point to keep in mind is that today’s industrial, technological and economic logic is undoubtedly in favour of the creation of megacorporations, and that the limits to the creation of such megacorporations are set not in the worlds of industry, business, management, technology, finance and economics, but in the worlds of society and politics.

The basic issue that the world needs to address, sooner rather than later, is: should we allow such mega-corporations to be created? (Existing legislation in the USA and Europe certainly allows for their potential creation, as seen by the short-lived flourishing of AOL Time Warner and Vivendi Universal). If we do continue to allow the creation of such mega-corporations, then the basic issue for the world is: how many mega-corporations do we need or should we allow? These are of course political questions. And the mark of the age into which we are now embarked is that political, economic, business, ethical and social questions come together more and more.

Regretfully, most companies are not equipped, at present, to negotiate their way through this complex modern reality. So the real challenge for companies today is not merely making joint ventures and learning alliances of various sorts work effectively. It is rather how to learn to negotiate their way through the complex and multi-dimensional and at the same time rapidly-changing world in which we now live. That is why most companies are in strategic paralysis today.

In other words, the only sustainable edge does not consist in partnerships, of the sort suggested by Seely Brown and Hagel. The next sustainable business edge consists in the creation of mega-corporations. The problem is that the creation of such mega-corporations also poses an enormous socio-political question and challenge to the whole of our globalising world.

ENDS Sphere: Related Content

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