Value Chain 2.0 Precursors

Paul Roberts has an interesting post on Value Chain 2.0: the use of Web 2.0 methodologies and platforms in value chain analysis, process redesign and supply chain management (SCM).

Value Chain 2.0 transformations actually predate Tim O’Reilly’s Web 2.0 term but this is largely hidden from non-domain experts.  One reason why is the historical influence of engineering and mechanistic models on public perceptions of SCM.  Logistics, operations and industrial economics all moulded Michael Porter‘s value chain model.  Mainframe interfaces shaped SAP‘s materials management and enterprise resource planning systems.  A climate of downsizing and recessions influenced how business leaders applied Michael Hammer and James Champy‘s business process reengineering.  SCM has evolved yet the public perceptions remain.

There’s a broader context and history to Value Chain 2.0 that some Web 2.0 descriptions may not do justice to.  Some of the more well-known examples: Eric von Hippel cast the die in The Sources of Innovation (New York: Oxford University Press, 1988) about 3M‘s ideation, innovation and new product development processes; von Hippel elaborated on discussions which occurred since the mid-1970s.  SAP and other ERP vendors have had end-user case studies in conferences for over a decade.  Dell‘s dotcom era choiceboard for consumers to customise their orders meant more efficient throughput and higher inventory turnover.  Lego Mindstorms builds on decades of insights in constructivist learning and robotics.  Procter & Gamble‘s Connect + Develop initiative reflects P&G’s expertise in brand development and consumer goods marketing, and leverages decade-long trends in knowledge management and information systems.  This suggests a deep history or a path dependence to many ‘new new’ Web 2.0 cases and trends.

Perhaps Value Chain 2.0’s initial contributions are to make these initiatives more explicit to non-domain experts and to provide an accessible interface for consumers.

Decision Sciences For The Masses

Malcolm Gladwell‘s new book Outliers: The Science of Success (New York: Little, Brown & Co., 2008) appears to be the publishing event of the week.

Gladwell (The Tipping Point, Blink) spearheads a group of writers who are masterful at using anecdotes about insights from statistics, system dynamics and the decision sciences that will interest a broad readership.  This group also in  Chris Anderson (The Long Tail), James Surowiecki (The Wisdom of Crowds), Nassim Nicholas Taleb (Fooled by Randomness, The Black Swan), Tim Harford (The Undercover Economist), Steven Levitt and Stephen Dubner (Freakonomics), and Michael Lewis (Liar’s Poker, The New New ThingMoneyball) also belong to this group.  Apart from outliers and tipping points these books explore intuitive decisions, long tail distributions, the Law of the Many, chance, low probabilty high-impact events, martingales, and data-driven decisions.  Each author has a different background: Taleb is an epistemologist and former trader, Anderson is a technology pundit, and Lewis, Gladwell and Surowiecki are essayists and journalists.

For me, six observations emerge from these authors.  First, they have a writing style that appeals to a broad audience.  Second , they provide an introduction to quantitative elements of decision-making and judgments.  Third, their publishers have created a niche market in airport reading and popular science paperbacks.  Fourth, they differ in their approach to theory building: Anderson, Gladwell and Surowiecki take an insight, interview people, and promote it; Taleb, Harford and Lewis draw on their domain experience; and Levitt and Dunbar illustrate how a subject matter expert can collaborate with a journalist to reach a broader audience.  Fifth, their books have seeded a range of Web 2.0 strategies, which vary in rigour, validity, generalisability and applicability to real-world analysis.

Finally, their publishers have used their marketing appeal to build an audience during turnarounds and post-acquisition integrations: Gladwell and Surowiecki helped revive The New Yorker, Levitt and Dunbar’s blog gained The New York Times an Internet readership, and Anderson revamped Wired after Conde Nast‘s acquisition.

Goldman Sachs’ Foresight Culture

Recently I posed two questions about Foresight in Organisations: What are are the intervention points?  After five or six years, who are the teachable case studies for successful implementation of the foresight function?

I’ve only read the Los Angeles Times and New York Times reviews but Charles D. Ellis’s The Partnership: The Making of Goldman Sachs (Penguin Press HC, New York, 2008) has some answers to both questions.

Ellis suggests Goldman Sachs has three intervention points to cultivate a foresight function: (1) a human resources function staffed by A+ people who recruit “A+++ people” usually in computational finance, financial engineering and statistical arbitrage; (2) an organisational culture tolerant of the “longer-term view” that is linked to the “[operational] details” necessary for strategic execution; and (3) a creative tension between past excellence and new frontiers.  Intriguingly, the “longer-term view” or “forward view” in Foresight parlance, emerges from people in a supportive culture who are faced with challenge at the boundary of the firm and the external competitive environment.

Two other biographies partially validate Ellis’s insights.

Perry Mehrling’s biography Fischer Black and the Revolutionary Idea of Finance (New York: John Wiley & Sons, 2005) and his working paper ‘Understanding Fischer Black‘ describe why Goldman Sachs recruited the economist Black: to tap his academic knowledge to design new financial instruments, and use his influence as coauthor of the Black-Scholes equation in finance to impress clients.

Emanuel Derman describes his Goldman Sachs collaboration with Black in My Life As A Quant: Reflections on Physics and Finance (New York: John Wiley & Sons, 2004) and how the firm benefited from the influx of PhD graduates in the 1980s.  Derman was bored at AT&T Bell Labs which had a reactive culture of research management.  He transitioned into Goldman Sachs’ fixed income division in 1985 and then moved to equities in 1990 where he thrived for the next decade in a culture that appreciated how conceptual expertise can underpin a firm’s competitive advantage in new growth markets.

The contrast was so different that I pointed Derman’s experience out in a private submission to Australia’s National Innovation System Review (aka Cutler Innovation Review) in comments about the institutional design and research management culture of Cooperative Research Centre consortia.  Maybe given the subprime fallout CRCs can also learn something from Goldman Sachs and Berkshire Hathaway‘s Warren Buffett who has now taken a $US5 billion equity stake in Sachs’ foresight culture.

Foresight in Organisations Revisited

A few years ago I took a Masters unit of study about Foresight in Organisations.  In its early iteration the unit covered several topics:

∙ Conceptual theories of strategic planning: Alfred Chandler‘s structure and strategy, Michael Porter‘s 5 Forces model and contributions to industrial economics, Gary Hamel & C.K. Prahalad‘s early work on core competencies and industry whitespaces, and Henry Mintzberg‘s eloquent critique of the strategic planning function.


The operational span of strategic planning including an overview of
business units, corporate level strategy, and multi-national
conglomerates.

∙ Good practices in change management and organisational interventions such as Elliott Jacquesrequisite organisation, Ralph Stacey’s shadow or informal networks in organisations, Richard Hames‘ strategic navigation, and Peter Senge‘s view on learning organisations.

∙ Practitioner reflections and post-implementation case studies on creating a foresight function in organisations from Andy Hines, Sohail Inayatullah, Peter Hayward and Joe Voros.

The most fun part was a lunch with Hines around the launch of the Association of Professional Futurists.

The
student cohort grasped several hypotheses from these topics: (a) the
limits of traditional strategic planning in a complex environment, (b)
the emergence of anticipatory management and strategic foresight as two
new paradigms, and (c) how the foresight function may be embedded in
organisational culture.

In retrospect three broad trends may have influenced the topics and hypotheses:

(1)
Hamel & Prahalad’s view led a new wave of practitioners to frame
the foresight function as a managerial core competence in pragmatic
strategic thinking (thanks to Mike McAllum
for his practitioner insights on Hamel’s influence).  In the contract
phase of a consulting engagement this meant the practitioners often
linked foresight to growth options, visioning and corporate strategy. 
Clients were receptive, partly due to Hamel & Prahalad’s solutions
at the firm and competition levels.  More broadly, exogenous factors
played a major role in creating the macroeconomic climate for client
demand: the 10-year Juglar business cycle, the late 1990s Internet bubble and the M&A wave of European industry consolidation.

(2)
Hamel & Prahalad’s work coincided with the diffusion of new
frameworks for organisational interventions from management theorists
into consulting firms.  Senge’s systems modelling at MIT’s Society for Organisational Learning and Arie de Geus‘s scenarios work at Royal Dutch Shell
were two such frameworks.  If Hamel & Prahalad provided the
strategic rationale, then Senge, de Geus and others suggested the
intervention points: how a forward view and systems awareness could
enhance managerial decisions about corporate strategy.  However this
alignment of the foresight function with strategic thinking did not
explore other potential intervention points: cost management systems,
project hurdle rates for risk-return, and operations management. 
Attention to these would bridge the strategy|operations divide in
organisations that demand quantifiable results.

(3) An
alternative route for contract phase buy-in was to connect the
foresight function with a hot topic that interested the client.  On the
upside, this was a way to raise awareness of dynamics, forces, trends
and challenges beyond the firm or market.  On the downside, the buy-in
now depended on the currency of the hot topic, the differential
diagnosis skills of the practitioner, and the value created by the
solutions.  If the hot topic waned, so might the buy-in for the
foresight function.

With the benefit of five years hindsight I now see how some barriers to Foresight in Organisations might be avoided.

Foresight
in Organisations gives students a grounding philosophy that informs
their consulting approach.  However its philosophy is also a relatively
young discipline with multiple schools of thought and stances, and in
competition from other frameworks, methodologies and stances for client
dollars.  This poses translation challenges between the Foresight
practitioner and their client that arise in the contract, data
collection and implementation phases of a consulting engagement. 
Clarity on how philosophy informs rationale may help the engagement go
smoothly.

The Foresight practitioner also faces cognitive biases
and judgments that can affect their consulting decisions during an
organisational intervention.  The Foresight practitioner’s enthusiasm
for Foresight as a normative stance and silver bullet solution can set them up to fail or give their solutions a shorter half-life.  Specific cognitive biases that the Foresight practitioner may be prone to include positive illusions about their implementation competencies, illusion of control
over others, and unrealistic optimism about the likelihood of
organisational transformation.  The client may also have a shadow
agenda about power and the direction of organisational change which can
blindside any intervention.  Finally, as the Foresight practitioner is
not embedded in the organisation their enthusiasm for change can
trigger defensive routines from others that may delegitimate the
practitioner, block the microprocesses for change, or derail the
organisational intervention.

I learnt the most from the war
stories of other Foresight practitioners: what worked, what didn’t, how
and why interventions failed, and what was done the next time.  You may
mess up as others have messed up before you.  Now I have my own war
stories to add . . .

Change.gov

During a stint as Disinformation‘s site editor I learnt to monitor how analysts and experts respond to significant events.  Analysts and experts can situate the significant event in relation to a discipline or knowledge area.  So, it’s a strategy in which the event and the expertise are wayfinders to help learn about the discipline, in a contextual, real-time way.

For the past five days I’ve looked at Change.gov: how President-Elect Obama uses open government principles and strategic communication to implement his transition prior to the Inauguration on 20th January 2009.  It’s not all gone smoothly: ProPublica‘s Mike Webb and BoingBoing‘s Xeni Jardin note that some early information on Obama Administration policies were removed (Slate confirmed this occurred).  The Obama campaign’s Twitter page may be dead as the President-Elect now opts for more traditional media outlets.  Despite this, Change.gov is a very intriguing project that generates lots of commentary in the media and policy circles.

As a real-time case study Change.gov may turn out to be a richer learning experience than an entire bookshelf of dotcom era books on change management projects, e-government transformation and e-policy ecosystems.  Who will write the case study for Harvard Business School MBAs and Harvard Kennedy School policymakers?  Will the Obama Administration license David Bowie‘s “Changes” as the site’s theme music?

A side-benefit of Change.gov is some really insightful media commentary about the games that new political appointees must play to thrive in the Beltway.  Exhibit One: The New Republic‘s Noam Scheiber explains how Tim Geitner cultivates a keen political awareness for institutional buy-in and is a frontrunner for the US Treasury Secretary.  Geitner’s insights are useful for change agents or anyone who wants to navigate organisational politics.

CPRF08 Presentation: Disruptive Innovation, Radiohead & Nine Inch Nails

I recently spoke at the 2008 Communications Policy Research Forum in Sydney on disruptive innovation in the music industry.  My presentation looked at the reasons for why Radiohead and Nine Inch Nails pursued online release strategies for their respective albums In Rainbows (2007) and The Slip (2008), and evolved from some initial thoughts here. The reasons suggested in media coverage – Web 2.0 experiments, disruptive innovation and freeconomics – were ‘true yet partial’ explanations.  They overlooked two significant facts: (1) both artists were in the ‘label shopping’ phase near the end of their contracts; and (2) both artists were frustrated with their respective labels EMI and UMG, who each triggered artist defections due to post-merger integration problems.  The presentation also discusses the role of Disruptive Innovation Markets, the Disruptive Information Revelation principle, and lessons for journalists, new media theorists, policymakers and valuation analysts.  Thanks to the Network Insight Institute team (Mark Armstrong, Cristina Abad and Mark Armstrong) and the two anonymous reviewers for their help.

Patti Smith: Dream of Life

Steven Sebring’s sprawling documentary Dream of Life explores a 12-year Saturnian arc in the life of poet and musician Patti Smith.  She moves from Detroit, Michigan to New York’s Chelsea Hotel after the death of husband Fred ‘Sonic’ Smith, and reactivates her touring band.  Sebring interweaves historical glimpses of her early recordings and encounters with Beat author William S. Burroughs with the praxis of a return to performance: late night ideation sessions, fellow musicians tuning Smith’s guitars, a meditation on Coney Island, backstage warm-ups, impromptu jams, and onstage free-form poetry.  Smith situates her search for stillness in the mundane (an angst-free visit to her parents for dinner, scenes with son Jackson and daughter Jessie), the spiritual (breaking down during a reading in memory of Beat poet Allen Ginsberg), the aesthetic (visits to the graves of Beat poet Gregory Corso and Decadent author Arthur Rimbaud), and contemporary politics (a call to arms against the Bush Administration).  Amidst the Romanticist rage for life are moments of quiet revelation: Smith tells how her brother’s death triggered a transmission of baraka (grace).

No Exit

The live shows are amazing when the band focuses on the music but things fall apart in between.

That’s the narrative arc of No Way, Get F*#ked, F*#k Off! an SBS/Beyond International documentary on the reformation of the Australian rock band The Angels after eight years of legal battles.  The documentary contrasts fan jubilation with the band’s in-group struggles: leadership battles between lead vocalist Doc Neeson and rhythm guitarist John Brewster over setlists and song arrangements; drummer Graham ‘Buzz’ Bidstrup’s disagreements with management over the contracts for merchandise and songwriting royalties; and the weight of the past, notably an archive trip with revelations about The Angels‘ support tours at their prime with David Bowie, Cheap Trick and The Kinks.

No Way, Get F*#ked, F*#k Off! wisely steers away from The Angels’ live performances on a small club tour.  Instead, we see how subgroup coalitions form over the tour, from rehearsals to the final gig.  Neeson and John Brewster’s strong personalities act as two magnetic poles.  Neeson appears frustrated that Brewster and lead guitarist Rick Brewster use pincer-style tactics to get their way on key decisions.  John Brewster feels compelled to defend The Angels’ management which is taking on the financial risk of the tour, and the record company which offers a favourable deal.  Bidstrup is cautious because of past contracts that signed away his
legal rights during The Angels’ 1976-81 vintage period.  He also points that Brewster-Neeson-Brewster received royalties as the core songwriters, so there are incentives and power imbalances in the group that affects the decision-making process.

As the tour unfolds the group dynamics change.  Neeson extracts an early concession to have Neeson-Brewster-Brewster on the tour merchandise.  Bidstrup demands further assurances on the scale and scope of the tour contracts.  John Brewster claims Bidstrup is being “difficult” because of his business management and entrepreneurial experience outside The Angels.  Brewster and Bidstrup misinterpret eachother in meetings as Neeson withdraws.

No Way, Get F*#ked, F*#k Off! ends on an uncertain note: management refuses Bidstrup can attend a pivotal meeting, Brewster defends their decision, and Neeson counters that he is uncomfortable with excluding Bidstrup.   As the credits roll Bidstrup wonders on-camera if he will remain in The Angels or if he joined the tour just to “close the circle” on earlier events.  Bidstrup could leave, as Jason Newstead and Joey Belladonna did respectively from Metallica and Anthrax (after their Among The Living reunion in 2005-07).  Alternatively, The Angels could partly resolve Bidstrup’s concerns with songwriting credits for new songs to all band members, as Queen did on their final studio albums with Freddie Mercury.

Foreign Direct Investment In North Korea’s Kaesong Industrial Park

For many people North Korea evokes the comic image of the lonely playboy Kim Jong-il in Trey Parker & Matt Stone’s Team America World Police (2004).  I found a more complex sociopolitical reality in 2006 whilst researching a Masters mini-thesis which dealt in part with North Korea’s covert nuclear weapons program.  A week after handing the mini-thesis in Disinformation’s video producer Nimrod Erez sent me links to stark photos of daily life in North Korea’s capital Pyonyang (folio 1, folio 2 & discussion board): deserted highways, military monuments to past battles and derilect residential towers.

Kim Jong-il’s nuclear ambitions were a significant barrier to foreign direct investment (FDI) in North Korea notably under South Korea’s Sunshine Policy to achieve geostrategic stability in the Korean Peninsula.  Jong-il’s nuclear rollback “opens the way” to Hyundai Asan‘s FDI investment in the Kaesong Industrial Park (YouTube promotional video).  South Korea’s small and medium enterprises (SMEs) spearhead the FDI initiative which creates an emerging market, provides knowledge transfer, and hedges against country and currency risks.  South Korea’s government further offsets the SME’s country and operational risks with “low-interest loans and insurance.”  The SME’s engagement strategy also benefits emerging market watchers such as the blog North Korean Economic Watch.

If the FDI initiative fails then North Korea officials can always turn Kaesong Industrial Park into a subsidiary of the Erich von Daniken theme park in Interlaken, Switzerland.

Duelling Web 2.0 Scenarios: Boom/Bust

Has Tim O’Reilly’s Web 2.0 meme become a high-tech bubble about to burst?

Origins of the Web 2.0 Boom

O’Reilly’s vision of a new Web platform originally fused two developments.

The first development: C, Smalltalk and object oriented programmers devised design patterns in the early 1990s to reuse software code and workaround solutions across projects.  A 1995 catalog catapulted its four authors to software engineering fame.  To capture the rapidly growing number of design patterns programmer Ward Cunningham created the first wiki: the Portland Patterns Repository.

The second development: a re-evaluation of dotcom era business models to encompass new technologies that enhanced the end-user experience including the site interface and information architecture.  Industry buzz around News Corporation’s acquisition of MySpace (18th July 2005), Yahoo!’s purchase of Flickr (21st March 2005) and del.ico.us (9th December 2005), and Google’s stock-for-stock deal for YouTube (9th October 2006) made O’Reilly’s vision the ‘default’ vision for Web pundits and investors.

The media’s buzz cycle soon went into warp speed as Facebook frenzy replaced MySpace mania.  In a move that exemplified the pivotal role of complementors O’Reilly & Associates morphed into the juggernaut O’Reilly Media.  Ajax and Ruby Rails soon replaced Java and C# as the languages for new programmers to learn.  For activists in community-based media, angel investors investing in scalable programming prototypes and international conglomerates seeking to control their industry white-spaces Web 2.0 provided an all-encompassing answer to venture capitalists on how they would change the world.

Two Scenarios: Web 2.0 Boom & Bust

For industry pundits Google’s decision in October 2008 not to acquire Digg may signal the Web 2.0 boom has become a bubble.  If true Google’s decision could be the mirror of News Corporation and Yahoo!’s acquisitions in 2005.  Slate‘s Chris Anderson points to several factors: no tech IPOs in the second quarter of 2008, the cyclical nature of the digital consumer market, the exit of Yahoo! as a potential buyer due to internal problems, market noise due to low barriers of entry for startups, and a smaller “window of opportunity in which startups can think of a new neat trick, generate buzz, and cash out.”  YouTube’s co-founder Jawed Karim adamently believes that Silicon Valley is in a bubble.

Twitter is the latest startup in the duelling scenarios of Web 2.0 boom versus bust. New York Times journalist Adam Lashinsky experiences a similar euphoria to Facebook and YouTube when he visits Twitter’s co-founder Jack Dorsey.  Sceptics counter that Facebook and YouTube have not ‘monetised’ their business models into profitable revenues.  Portfolio‘s Sam Gustin raises the ‘monetisation’ problem with Twitter co-founder Biz Stone who believes that service reliability is a priority over the “distraction” of revenue pressures.  In support of Stone’s position Anderson observes that cloud computing and open source software are lowering the operational costs and slowing the burn rates of startups.

Yet monetisation remains a primary concern for Sand Hill Road entrepreneurs and other venture capitalists.  They differ in their decision-making criteria to Web 2.0 pundits and high-tech futurists: for angel investors and first round VC funding the entrepreneurs will demand a solid management team, the execution ability to control an industry whitespace, and viable sources of future revenue growth.  This is the realm of financial ratios and mark-to-market valuation rather than normative beliefs and ideals which probably influenced the acquiring firm’s decisions and valuation models in 2005-06.

Furthermore, if a Web 2.0 bust scenario is in play, the ‘contrarian’ sceptics will look to Charles Mackay, Charles P. Kindleberger, Joseph Stiglitz and other chroniclers of past bubbles, contagion and manias for guidance.  With different frames and time horizons the Web 2.0 pundits, high-tech futurists and venture capitalists will continue to talk past each other, creating still more Twitter microblogging, blog posts and media coverage.

Several preliminary conclusions can be drawn from the Web 2.0 boom/bust debate.  In a powerful case of futures thinking O’Reilly’s original Web 2.0 definition envisioned the conceptual frontier which enabled the social network or user-generated site of your choice to come into being.  The successful Web 2.0 startups in Silicon Valley have a distinctive strategy comparable to their dotcom era counterparts in Los Angeles and New York’s Silicon Alley.  Web 2.0 advocates who justify their stance with MySpace, YouTube and del.icio.us are still vulnerable to hindsight and survivorship biases. There’s a middle ground here to integrate the deep conceptual insights
of high-tech futurists with the quantitative precision of valuation
models.

It’s possible that the high-visibility Web 2.0 acquisitions in 2005-06 were due to a consolidation wave and strategic moves/counter-moves by their acquirers in a larger competitive game.  There are two precedents for this view.  Industry deregulation sparked a mergers and acquisitions boom in Europe’s telecommunications sector in the late 1990s comparable to the mid-1980s leveraged buyout wave in the United States.  Several factors including pension fund managers, day trading culture and the 1999 repeal of the US Glass-Steagall Act combined to accelerate the 1995-2000 dotcom bubble.  Thus, analysts who want to understand the boom/bust dynamics need to combine elements and factors from Web 2.0 pundits, high tech futurists and venture capitalists.

If the Web 2.0 boom has become a bubble then all is not lost.  Future entrepreneurs can take their cue from Newsweek journalist Daniel Gross and his book Pop! Why Bubbles Are Great for the Economy (Collins, New York, 2007): the wreckage from near-future busts may become the foundation of future bubbles.  Web 3.0 debates are already in play and will soon be eclipsed by Ray Kurzweil‘s Transhumanist agenda for Web 23.0.