Strategic Obsolescence

 My latest column for The Hindu Business Line - Strategic Obsolescence. Full text follows:

A major cause of the failure of most organisations is their inability to foresee their own obsolescence and remaining stuck in their old ways of doing things. In this article I argue that every organisation must actively plan for its own obsolescence, and work in parallel on future opportunities. In other words, becoming obsolete should be part of the core strategy of a firm.

This entails taking a flexible view on the core purpose of the organisation. Not surprisingly, most firms tend to ignore the possibility of extinction until it’s too late. This is because most of firms’ energies are involved in improving upon past metrics, and very less energy is devoted to the future that is emerging.

Studies show that the average Fortune 500 company only exists for about 40 years. This means that even the largest, most well-managed organisations, are woefully short on vision when it comes to evolving with the marketplace.

 

Model of innovation

The accompanying graphic demonstrates the implications of strategic obsolescence. Every new industry begins with an early wave of innovators or market creators who create a new market.

First movers have the freedom of pricing and tend to use this to their advantage by skimming the market. As more and more players get in, efficiencies increase and prices fall further as a result. At one point, the market is saturated and prices and efficiencies plateau out. At this point, in most industries the incumbents begin looking for growth by setting up subsidiaries in new markets, and doing more of the same.

Meanwhile, some new innovator may introduce a disruptive product that may act as a perfect substitute to the current product and still be just as competitive on all dimensions. Alternatively, another innovator may be working in a direction where future Government policies are headed (example Green Energy). This is when large, bulky incumbents are taken by surprise and end up facing the possibility of extinction.

A company that invests in its own ‘strategic obsolescence’ will start aggressively investing for the future at every downward slope of the Z depicted in the graphic (similar to the S-curve concept commonly used to depict innovation). Incidentally, the downward slope of the Z also indicates a transition from innovative product to commodity.

 

Examples

A number of industries demonstrate a lack of planning towards strategic obsolescence. American automakers who have always resisted green/ hybrid vehicles may have well found themselves at the cusp of a lucrative new opportunity had they invested in that opportunity many years back. Instead, they face imminent bankruptcies.

Similarly, the conflict between traditional electric utility companies and new green technologies is likely to play out in a similar manner as Governments invest in and incentivise these new technologies, while the existing players may lobby for their own self-preservation.

A lot of technology companies understand this idea quite well because the rate of obsolescence of technological products is far higher than any other sector (the ‘Z’ in their case would be more like a steep step).These firms have entrepreneurial teams that are constantly working on determining what the next wave is likely to be, and iterating new innovations to meet the challenges of the future.

An alternative approach seen today is the acquisition of early stage ventures that are already working on disruptive ideas, and incubating those ideas (even if they turn out to be failures in the future).While it may appear counter-intuitive to invest in one’s own obsolescence, it must be kept in mind that other firms working on disruptive innovations are already doing so. The options then are to either invest for obsolescence or face unexpected extinction.

In conclusion, it is important to view extinction as a given and thus not get too attached to the idea of a core product line that remains static, and oblivious to the changes in the environment. In other words, the firm not only ‘exists’, but is actually a living, breathing entity that is constantly ‘becoming’.

Being indicates status quo, while becoming indicates a vibrant, creative outlook that is open to an ever-changing environment.

Older Columns:

• From Alienation to Meaning
  
• Institutionalizing Insight
  
• The Service Oriented Organization
• The Free sourcing ecosystem
  
• Changing Time
• Organization Culture as an Emergent Phenomenon
  
• Wealth in Ideas and Relationships
  
• Unlocking Value - extending self-actualization to organizations 
• An evolutionary view of leadership
• Leaderless Groups - a case against hierarchy
• The long tail opportunity
• Interactive Brands
• The spiritual organization
• The networked marketplace
• Decision making in groups
• Free riding and social loafing

 

From Alienation to Meaning

My latest column for The Hindu Business Line - From Alienation to Meaning . Full text follows.

It might sound like an unlikely place to find insights into human potential pertaining to the modern world, but Marx’s ideas on alienation continue to be relevant even in the world of free markets. It appears that the long journey spanning centuries from a factory-centred economy to a knowledge-based one hasn’t quite seen a proportional change in the way human capital is viewed. In this article, an attempt is made to bridge this gap by loo king at two concepts which mark the ends of the spectrum — Alienation and Meaning.

Marx identifies four sources of alienation that ‘workers’ in a capitalistic society feel.

• The first form of alienation is that between the worker and the product of his labour, as he has no rights to it after production.
• The second is between the worker and the process of production — in other words, predictable, well-defined transactions are the order of the day.
• The third is alienation between fellow human beings as a result of a class structure or hierarchy that emerges in any organised structure like this.
• The fourth source of alienation is alienation from the worker’s human essence, whereby all possibility of creativity and spontaneity are stripped away from a human being.

An important difference between humans and other animals is in the way they interact with nature — while animals interact in a static way to the external world, humans are endowed with consciousness and imagination which allows them the faculty of being able to visualise new future possibilities first in their minds, and then in the world outside.

Of course, all these sources of alienation were originally described in the context of blue-collar or factory work which was the dominant kind of labour in those days. However, quite surprisingly, the entire concept seems equally applicable to the modern world where the ‘worker’ is engaged primarily in white-collar work.
It’s quite astounding that the way work is viewed and structured has undergone so little updating in all these years. It appears that only a few token steps have been taken in the direction of moving away from alienation, without a clear articulation of where the destination is.

In this article, I argue that the ideological opposite of alienation is meaning, and that should be the direction towards which all future notions of work must converge.

The meaning infrastructure
A post-alienation world view would be based on the idea of ‘meaning’. All the four causes of alienation identified above would need to be addressed. The journey from alienation to meaning would need to be accompanied by the creation of appropriate infrastructure. This infrastructure would consist of four key pillars — each mapped to a source of alienation.

The first pillar would be the creation of significant distributed ownership of equity across the firm. This would mean far greater ownership than the token ESOPs that exist in the market place today. Currently, there is an under-estimation of the value of human capital relative to financial capital. However, it is encouraging to see that a large number of firms these days adopt some form of compensation in the form of equity.
The second key aspect of this new infrastructure would be a systematic extinction of ‘job descriptions’, and an emergence of ‘responsibility descriptions’. A responsibility description outlines outcomes, and not behaviours. How outcomes are accomplished is left to the imagination of the employee.

The third element of the infrastructure is the creation of flatter hierarchies that eliminates the needless creation of layers or artificial ‘career paths’ where each step tends to signify vintage rather than genuine upgrade of skills. Again, this concept is already widely in use, particularly in new ventures without the legacy of large, pre-existing hierarchies.

The fourth pillar is the recognition of innovation and creativity as key sources of value addition from the workforce. Currently, the perception of value addition is restricted to increase in revenues and reduction in costs. Innovation is seen as a response reserved only for crisis situations, as opposed to an ongoing process of articulating fresh responses to the environment.

Of course, there are many ways to create meaning, and this is just an indicative set of ideas.
An important quality of the modern ‘worker’ (or indeed human beings in general) is the belief in one’s own uniqueness. This belief translates into a need to create customised experiences for oneself in all dimensions of one’s life. It’s time society updated the way it views work to reflect this desire.

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Previously published articles:

• Institutionalizing Insight
  
• The Service Oriented Organization
• The Free sourcing ecosystem
  
• Changing Time
• Organization Culture as an Emergent Phenomenon
  
• Wealth in Ideas and Relationships
  
• Unlocking Value - extending self-actualization to organizations 
• An evolutionary view of leadership
• Leaderless Groups - a case against hierarchy
• The long tail opportunity
• Interactive Brands
• The spiritual organization
• The networked marketplace
• Decision making in groups
• Free riding and social loafing

Telecom pricing

With the price wars in telecom intensifying each day in what is already the cheapest telecom market in the world, I think the logical next step in pricing innovation will be something like this: Pay Rs. X per month, and use your phone as much as you want.

I think this will happen in the next 12 months. This  way the telecom companies will be able to protect or guarantee their Average Revenue Per User even if its at a low level. Of course, price wars will start on the monthly amount as well, and telecom companies will need to innovate further. Also, within the next five years, VOIP may also become a viable alternative to traditional telephony. Interesting times ahead.

Three skills

Seth Godin has an interesting post on what he believes to be the three skill areas that ensure you are in demand as an employee:

• Sales
• Additive effort (someone who brings in efficiencies)
  
• Initiation (someone who can initiate action... or start something transformational)

I think the three skill areas can be re-articulated as follows:

1. Someone who can increase revenue
2. Someone who can reduce cost
3. Someone who can bring creative ideas to life or create new wealth creating assets.

Seth rightly points out that the last skill is difficult to value. The first two are directly P&L oriented, while the last one is more fuzzy and takes time to enter the P&L, and is also prone to failure i.e. ( a lot of entrepreneurial initiatives tend to fail or fizzle out) .

Story of Stuff

A really fascinating presentation - Link

In short, it argues that our entire economy and our self worth is now linked to the idea of being consumers who will infinitely keep the engine of production going, without being mindful of the destruction that this is causing to the environment, as well as the harmful effects on society as a whole.

I think the future lies in sustainable local economies, where most of the basic 'stuff' we need is produced in our local economy or neighbourhood, consumed locally, and then disposed and recycled. If something can't be recycled or disposed harmlessly, it should not be produced in the first place. Also the single biggest piece in this consumption engine is Energy, and hence the sooner we move to green energy the better.

It seems like change can happen more easily in developing and poor economies which haven't yet gone through the entire cycle of increasing incomes and consumption. On the contrary, we have India arguing at climate change forums that developing countries should be spared the burden of contributing to reduced carbon footprints etc. as all that would come at the cost of development. In other words, we are arguing that we will first replicate what the developed economies did, commit the same mistakes, and only then be held accountable for any damage we may caused in the process!

Brokerage Comparison - ICICI Direct, SBI, HDFC Securities etc

Out of curiosity I did a comparison of brokerages across various providers of trading and demat accounts in India. Here are the findings:

For a delivery based volume of less than Rs. 50 Lakhs per quarter, here are the brokerages across some leading providers of trading and demat accounts.

ICICI Direct =fixed plan of 0.50%, (and a variable plan of 0.25-0.75% which is beneficial only for large investors)

HDFC Securities = 0.50%
SBI Demat = 0.50%
Reliance Money = 0.45%
Geojit BNP Paribas = 0.25% to 0.30%
Edelweiss = 0.30% to 0.50% 
Fullerton Securities = Upto 0.50%  on pre-paid plans
Angel broking = 0.35%



[Readers may drop in brokerage charges for other service providers and I will update the post accordingly.]

Life Settlements - The next sub-prime crisis

Undeterred by the mess that it created with securitization of mortgages (the Subprime crisis), Wall Street is now working on a new kind of securitization, that of life insurance policies. 

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.


... And investors are not interested in healthy people’s policies because they would have to pay those premiums for too long, reducing profits on the investment...

More here

Some clear flaws that could make this the next bubble are:

1. With better health care facilities and medical research, people will end up living longer thereby reducing returns on these 'life settlements' for investors like banks.

2. Some currently fatal diseases may soon have cures, causing the value of this new product to plummet.

3. A large market may emerge where people buy insurance policies just to 'flip out' and sell it to a bank. This is exactly what happened with real estate mortgages, where a whole bunch of people bought houses simply hoping to flip out as the underlying value of their homes went up.

4. Life insurance companies will blow up due to larger payouts being paid as a result of a greater percentage of policies NOT lapsing (a lot of long term policies lapse because the insured / dependents may no longer need the benefits).

5. Life insurance premiums will go up, implying that more and more people who actually need insurance will no longer cover themselves. As it is the poor are already on the fringes of the mainstream financial market.

6. The best returns on this investment product will be gained when the insured person dies sooner than later - there may well be some strange consequences to this.

7. A big market would develop for sub-prime policies (policies of people who are likely to die sooner). This product would be in the highest demand. Some rating agency will slap a AAA rating on it.  Either 1. or 2. listed above will cause a major blowout.

The article linked to above implies that Wall Street is going ahead full steam on this new product. Awesome.

Prospect Theory

Check out this old post on prospect theory.

Netflix culture and values

Here's an interesting internal presentation from Netflix on their company culture and values.

Among other things, the presentation argues that in order to preserve a high level of freedom as the organization transitions from start up mode to large organization mode, the organization will actually hire more and more star performers. In other words, you maintain freedom by hiring more responsible people who are good performers. I don't see how that is practical. A ten employee company can easily hire 2-3 stars and increase head count by 20-30%. However, a 1000 employee company would need to find 200-300 stars in the market place in order to maintain its star ratio as it were. This seems quite hard to do.

Culture

View more presentations from reed2001.

New Look

Testing a brand new visual identity and template for Management by Matrices.

Argentina's peculiar coin shortage

For well over a year now, small change has been hard to come by there. Stores hang “No Coins” signs in their windows, and offer candies instead of change. Taxi-drivers round up—or down—to avoid giving up precious coins, while smaller merchants sometimes turn away business if you have only bills to offer them. The government has fined banks thousands of pesos for refusing to hand over coins, and, in October, the city’s subways became temporarily free when the booths ran short of change. For the average Bonaerense, everyday transactions now entail a complicated calculation of where coins can be acquired and when they will be needed.

More here

Tata Docomo's launch

Tata Docomo's GSM service is being launched in a very Web 2.0 way, with a Twitter page ,Youtube Channel , and a very 'social' website with user comments, page ratings, share links for facebook etc. I see a very strong brand in the making - one that could challenge Vodafone. The pricing innovation of having a 1 second pulse rate is also a first. Of course, the actual network coverage and customer service will be the final decider, but all the preceding steps have been executed quite well.

Incidentally, Docomo has a strong R&D focus in Japan, which makes it the only player that is creating new technologies as opposed to just using existing ones. That's a fantastic source of long term competitive advantage in the face of 'commoditization' of telephony.

Bing Review: Microsoft’s first web winner

For a change Microsoft gets it right with Bing. Bing clearly wins over Google on the following counts:

1. Visual Appeal- reminiscent of Ask.com’s earlier avatar.
2. Speed – it’s just as fast as google.
3. Clean categorization of ‘Related searches’, using Powerset’s technology (I presume)
4. A preview feature that helps you read content from the target site before clicking.
5. An overall philosophy focused on getting as much of the information you need from the search engine itself before actually clicking and going to a site, thereby making it a decision engine.
6. A spectacularly clean integration of Travel and Shopping into the search engine in a manner never seen before, including the special Bing Cashback discounts that you can avail by clicking through and buying products via Bing search results. (This feature is available on the US version of the site.)
7. Finally, Bing looks like it was designed for ‘real’ users, while in retrospect Google looks like it was designed more for geeks than regular users.

In short, Microsoft has surprisingly achieved the next frontier in search. Google may well outdo it in the future, but Microsoft has set the agenda for sure.

Insight Institutionalization

My latest article for The Hindu Business Line appears here: Weaving Insight into an Organization's DNA. Full text follows.

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In Meno, one of the dialogues written by Plato, Socrates contends that all knowledge pre-exists in an individual; all he needs is the ability to find out what is already inside him. It appears that Socrates was referring to the ‘insight’ or ‘inspiration’ dimension to the creation of new knowledge.

A lot of times, new insights appear to us in a flash, out of no logical process based on facts. This statement holds true today too, as a significant portion of new knowledge creation is often based first on insight and subsequently on ‘finding evidence’ to support the conclusion.

Whatever the truth of this assertion, it is hard not to see that insight/ inspiration are key tools for knowledge creation. However, these two dimensions find little place in modern organisations.

Focus on facts

For long, fact-based approaches have assumed a prime position in management thinking. One reason for this could be that facts are not subjective and hence leaders may view facts as a risk-free way to push through initiatives, make decisions and find solutions to problems. However, it is increasingly becoming clear that decision making is a far more complex process, where the whole is often greater than the sum of the parts.

Systems Thinking is a form of analysis in which problems are solved not just by understanding a component or part of a system, but rather by looking at its inter-relationships with the ‘whole’. Such an analysis would clearly need more than just an analysis of facts; it would require inputs from more nebulous things like ‘inspiration’ and ‘insight’.

In the model depicted in the accompanying graphic, an attempt is made to understand how ‘insight’ is a function of many parameters — facts being only one of them. Data in the external world becomes information through its organising. Analysis of this information leads to partial insight. This is fulfilled through further contributions from past experiences of the decision maker, as well as the creative force of inspiration.

In the absence of experience and inspiration, it may well be argued that all decision making could be entirely done by machines and there is no need for human intervention. Moving on, codified insight becomes knowledge, which when acted upon becomes a practice. Practice in turn generates further data and so on.

Institutionalising insight

Unfortunately, most organisations do not invest in institutionalising the insight process. This means that ‘best practices’ may be discovered accidentally and not be scaled up to the entire system. Also, people end up sticking to existing norms, processes and approval mechanisms without questioning whether or not things could be any better. Here are some thoughts on how insight could be institutionalised.

Acceptance of failure: The first step is the creation of a culture that is extremely accepting of failure. It is not hard to see that the ability to see new creative possibilities is closely linked to a tolerant view of failure.

Investing in cross-functional skills: Organisations rarely invest in the creation of cross-functional skills amongst managers. One of the biggest threats to insight realisation is ‘silo-based’ thinking, where individual divisions seek to maximise their own self-interest, leading to highly non-cooperative political environments. In such environments, people tend to focus only on their ‘parts’ without realising that the ‘whole’ is greater than the sum of the parts.

For instance, most multi-product companies routinely fail in implementing effective cross-selling programmes because of this very reason. Once an investment is made in the creation of individuals who appreciate the ‘whole’, the above problems would diminish.

Hubs for insight realisation: To close the gap between insight and implementation, it would help to have hubs or teams that focus exclusively on realisation of insight in the real world.This would be done in the form of quick pilots, which if successful would scale up to become new practices.Often, line managers do not have the bandwidth to focus exclusively on such initiatives as they would come in the way of fulfilment of regular responsibilities or achievement metrics.

The role of new insight and knowledge creation in an organisation cannot be underestimated.Today, rapid advances in technology mean that the duration for which any organisation can hold on to a ‘competitive advantage’ is severely compressed.This implies that institutionalising insight is key to sustainability through the creation of new sources of competitive advantage.Hence, it is important to respect the role of insight and also understand that its source lies not just in fact-based analysis.

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Older columns:

• The Service Oriented Organization
• The Free sourcing ecosystem
  
• Changing Time
  
• Organization Culture as an Emergent Phenomenon
  
• Wealth in Ideas and Relationships
  
• Unlocking Value - extending self-actualization to organizations
• An evolutionary view of leadership
• Leaderless Groups - a case against hierarchy
• The long tail opportunity
• Interactive Brands
• The spiritual organization
• The networked marketplace
• Decision making in groups
• Free riding and social loafing

Service before Profit

My latest opinion piece for The Hindu Business Line appears here: Service before Profit
Full text follows:

We live in a world where the simple greed of private enterprise has led to a large scale economic recession. Yet, there is no serious discourse happening on whether things have fundamentally changed in the manner in which business is to be conducted in the future. As Governments announce bailout packages of unheard of proportions, it is abundantly clear that we are witness to an extraordinary period of ‘Keynesian’ State intervention in private enterprises and t he economy. This is as good a time as any to reflect on the fundamental motivations that drive business organisations and the role they need to be playing in the post-Industrial Revolution era. In fact, this period of time may well mark the last bridge between industrial era ideas of enterprise and the knowledge economy.

The Industrial Revolution

The Industrial Revolution was brought about by inventions like the steam engine and the invention of other technologies that enabled the mass production of goods at centralised locations and their subsequent distribution to markets. It may be argued that the seeds of a consumerist society were first sown at this time. Clearly, if you had the technologies at hand to efficiently mass produce goods, then it is only logical that at some point you would like to sell things to people who don’t need those things in order to keep the revenues coming in. Additionally, if shareholders demand growth in profits above all other considerations, the vicious circle becomes complete. In other words, all incentives point towards the creation of short-term bubbles in the quest for short-term gains.

Service Oriented Organisation

The post-industrial world clearly needs a new definition of what a business organisation exists for, particularly because service- and knowledge-based industries assume centre stage in it. It could be argued that this ‘new’ definition needs to place the notion of ‘service’ at its very heart. That definition could be as follows: ‘A structured social and economic entity designed for the efficient and scalable delivery of service to society in a financially and environmentally sustainable manner.’

It is important to note that this definition of an organisation does not include the word profit. Instead, it emphasises that a business needs to be viable both financially and environmentally. Man’s conquering of nature was an important characteristic of the Industrial Revolution, but the problems that the world faces today (climate change, for one) makes it clear that there is a need to get back in synch with nature.

In some ways, the definition also aims to integrate the western protestant work ethic (which some say helped achieve the Industrial Revolution), with the eastern notion of work as an offering (or service) to a higher power with no anticipation of results. Eastern philosophies pay more attention to the actual process of work and the attitude towards work as opposed to the results it produces. In our current context that means focussing on the everyday act of service to a customer as opposed to things like ‘ticket size’.

Implications of Service-Oriented Organisations

There are many implications arising out of using service as the primary metric of success. The first impact is on the notion of customer segmentation. Customer segmentation would now refer to the addressable group of customers who need a particular product or service, not necessarily those who can afford to buy it. Only when there is a genuine need can you genuinely ‘serve’. Everything else is mis-selling.

Secondly, it impacts the entire notion of pricing. Typically, businesses use pricing itself as a ‘strategy’, whereby a price is set on the basis of the value perceived by a customer as opposed to being based on the actual value of the product. When the former strategy is used, pricing becomes all about manipulation of customer perception, value through branding and positioning. In the new order, marketing and communication would centre around the communication of value and not the artificial creation of value.

Thirdly, shareholders would be rewarded more through dividends and less through capital gains. In other words, the excessive obsession with growth and diversification that characterises current industry would make way for a greater emphasis on quality of service and retention of customers while focussing on core competences. Of course, this does not apply to early stage businesses that are yet to scale up. Here, we are referring primarily to the large, well established players in any industry.

Finally, there would be an impact on human capital. It is not difficult to surmise that employees in a service-oriented organisation are likely to be more loyal and satisfied, and contribute more, simply because serving other people is far more meaningful than serving only a ‘bottom line’. It is easy to witness this phenomenon in public sector companies, which have a larger goal of ‘nation building’ that goes beyond mere profit.

None of these implications are beyond imagination. In fact, most successful organisations already use similar principles in various ways. Finally, it must be re-emphasised that a serviced oriented-organisation does not shun profits, but rather has its own way of looking at profits as part of a larger scope of end results and not the sole metric of achievement.

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Previously published pieces:

• The Free sourcing ecosystem
• Organization Culture as an Emergent Phenomenon.
• Changing Time
• Wealth in Ideas and Relationships
  
• Unlocking Potential
• An evolutionary view of leadership
• Leaderless Groups - a case against hierarchy
• Free riding and social loafing
• Decision making in groups
• The networked marketplace
• The spiritual organization
• Interactive Brands
• The long tail opportunity

When work is invisible, so are its satisfactions

Pretty interesting perspective on how the intangible nature of the work done by knowledge workers leaves them dis-satisfied at the end of it : link