Deming, Systems Thinking, Organizational DNA and Putting America First – Part II

12 11 2010

Abstract:

A new theory on organizational success claims that certain combinations of leadership, strategy, culture, and organizational structure have an evolutionary advantage over others.  While organizations that do not develop the right organizational DNA may have short-term success, they cannot sustain competitive differentiation in the long run in an open globally connected environment where communication, collaboration and commerce occur at the speed of light. 

 In part I of this blog [1], we examined how Deming’s systems thinking [2 and 3] and the new organizational DNA theory [4 and 5] offer some insights into developing sustainable competitive differentiation in business.  In part II, we examine how these theories apply to our nation and in particular the implications for the congress, the executive branch and the citizens to become an integral part of the system by putting “America First”.  The main lesson from this analysis is that the leadership of a nation needs to leverage different individual characteristics that are part of different cultural behaviors and support different organizational structures to execute different strategies to gain evolutionary advantage and competitive differentiation.  Leadership, strategy, culture, and organizational structure form the four base elements of a nation’s DNA.

This theory, if it is valid, puts the burden of success on the leadership and the citizens of our nation to apply Deming’s system thinking to collectively develop and execute successful strategies by cultivating and leveraging the necessary cultural and organizational diversity of the nation.

Individualism, Collectivism, organizational DNA, and Patterns of Evolutionary Advantage:

Theories abound that analyze individualism and collectivism and their role in organizational behavior and success.  “Although societies differ along many cultural dimensions, a key distinguishing characteristic of work behavior in societies is the way in which members relate to one another as a group. The pattern of responses with which individuals relate to their groups reflects their degree of individualism or collectivism. From an evolutionary perspective, a collective orientation has permitted humans the capacity to aggregate knowledge, develop a shared history, and protect evolutionary adaptations. Sociologists and anthropologists argue that people do not exist except within a social context.”   With these words, Earley and Gibson [6] take stock of a hundred years of progress in our understanding of individualism and collectivism. 

They make an observation that while individualists operate according to a self-interest, and collectivists operate according to a group interest, it does not, however, simply imply that collectivists behave selflessly nor do individualists behave selfishly.  “For instance, collectivists pursue self-interests as well as group interests as long as priority is given to the group, and they often set aside their personal goals out of a sense of obligation and normative control. The self-interests may coincide with group interests or be instrumental in attaining them.  Rather than viewing self and group interests as opposing motives, we can view them as separately linked to knowledge structures that are evoked in a culturally prescribed fashion.”  This observation makes it very important for the leaders of the group, when they define what Deming calls the aim of the system, to consider the self-interest as well as group interest and mobilize the collective strength to accomplish the aim.

The new organizational DNA theory claims that the leadership, strategy, culture and organizational structure are the four base elements and certain combination patterns of these elements have evolutionary advantage over others.  It goes further and states that different strategies require different combinations of culture and organizational structure to have an evolutionary advantage.  What works well for one strategy may not help to execute another. 

In part I of this blog, we examined how the organizational DNA applies to business and the strategies that provide competitive evolutionary advantage.  The aim of the business is to bring satisfaction to its stakeholders and different stakeholders are satisfied in different ways.  The investors and shareholders are satisfied with profits and customers are satisfied with good products and services that meet their cost and quality constraints.  Figure 1 shows the business stakeholders and various strategies that have proven to be successful.

Business Stakeholders and Organizational DNA

The leadership has to organize the organizational structure and develop a culture that suits the strategy as shown here,  For example, in order to  succeed in disruptive innovation, leadership must support a culture of cultivation and an organizational structure that brings both business and technical organizations to work together as a matrix to exploit customer intimacy and technical leadership. 

National DNA, Full Employment, Life, Liberty and Pursuit of Happiness:

How does the organizational DNA theory apply to our nation?  As a nation, we have the aim set by our constitution.  The leadership (the executive, legislative and the judicial branches) role is to develop the right strategies and execute them by leveraging the culture and organizational structure.  Figure 2 shows a potential stake holder model.

A Nation's Stakeholders

From Deming’s system view, different stakeholders have different interests.  For example, global private enterprises have no national loyalty because they are purely driven by their own profit motives and survival.  They will go wherever the resources are cheaper and wherever consumers are willing to pay for their products and services.  Non-Partner nations have no incentive to collaborate and will compete in any manner that is available to pursue their self-interest.  Without an overall level playing mechanism that lets free markets allocate resources optimally to benefit all parts of the system, the invisible hand of the free market economics which works well in an open environment to create a natural economic equilibrium falls short in a closed and artificially constrained environment created by overt and covert competition.  The” aim” of the nation which should benefit its citizens has to take into account the inherent conflicts and use right incentives to develop right strategies and create the right DNA for the nation.

If a nation’s aim is to protect and foster the “unalienable rights of its citizens, that among these are Life, Liberty and pursuit of Happiness of its citizens,” a national DNA that promotes equal opportunity for its own citizens to engage in gainful employment and contribute productively will have an evolutionary advantage.  A DNA which subsidizes a particular group’s interest over another will in the long run introduce friction in the system and cannot sustain competitive differentiation to compete with other nations. 

Invisible Hand of Economics, Communication, Collaboration and Commerce at the Speed of Light:

In addition, as long as nations operate as loosely coupled collaborating systems putting their own self-interest first, with rigid boundaries, each nation’s DNA tends to optimize its own survival probability at the expense of the other in the short run.  Global corporations will work within these constraints with their own self-interest.  For example, while cheap labor may attract global companies to move to other nations, it leaves the citizens behind with unemployment and diminished quality of life unless they can freely migrate or find other ways to compete.  The invisible hand of economics in the long run will establish an equilibrium by fostering the evolution of a nation’s DNA that optimizes the interests of the group of nations as a whole.  But in the short run, as communication, collaboration and commerce are conducted at the speed of light, each nation is on its own to fend its self-interest without causing short-term disruption.  New economic theories have to accommodate the impact of high latency that existed in the days of Adam Smith and John Maynard Keynes in conducting a business transaction compared with today’s speed of light transcending national boundaries.  The role of government in leveling the playing field with appropriate regulation also at the speed of light becomes important to guard against “hit and run” global operators and non-partner nations who want to exploit a free market access to further their self-interest at the expense of others.

Conclusion:

Deming’s system thinking and the new organizational DNA model provide an explanation of why some organizations sustain competitive differentiation in the long run.  Businesses leaders who leverage cultural diversity and different organizational structures to execute the four strategies (customer intimacy, operational excellence, product leadership and disruptive innovation) develop an organizational DNA that provides evolutionary advantage and sustainable competitive differentiation.  The aim of the business is to be profitable while satisfying all its stakeholders interests.

A nation on the other hand has to address a different set of issues in order to ensure its aim that benefits all of its citizens.  The major concern for the leaders of a nation is to provide a level playing field for its citizens, domestic businesses and global corporations while addressing the needs of its stake holders.  In an environment where communication, collaboration and commerce are conducted at the speed of light, a nation must provide a level playing field to its citizens and businesses that operate in its boundaries and guard against “hit and run” operators who try to exploit a free market access.  This puts a burden on the ideologues from the extreme right and the extreme left to reexamine their theories in view of the new reality of real-time commerce at the speed of light that transcends national boundaries.  Without a global regulatory mechanism that levels the playing field with authority, for all participants, each nation has to fend for itself.  A nation has to deal with both partner nations who collaborate and non-partner nations who do not cooperate to address issues through negotiation.  The resulting non-equilibrium economics cannot reach equilibrium through the influence of the conventional invisible hand economics.  A national DNA must adopt to cope with this non-equilibrium by developing appropriate strategies and execute them by organizing the culture and structure of its government to gain evolutionary advantage and competitive differentiation.   The new non-equilibrium economics puts a major responsibility in the hands of our nation’s leaders to develop right strategies and execute them with right combinations of culture and organizational structure.   Unless the leadership puts America first and thinks strategically to act in the interest of everyone and changes the national DNA to adopt to the new economic reality, we may revisit the fate of Ford, before Deming admonished the Ford management, on a national scale and our nation will loose our competitive differentiation we enjoy today.

As Professor Ballon [7], pointed out in my class on current issues in Japanese management twenty years ago, waste, duplication and occasional mismanagement are of no visible consequence in a culture that promotes individualism when the resources are abundant.  When the resources start becoming less and less abundant, the group as a whole cannot afford increased entropy that waste brings.  Similarly, in a collective culture, as resources start becoming more and more abundant, the group can afford a little waste, redundancy and individualism to foster innovation.  Groups usually decide where they stand in this spectrum of possibilities from completely unbridled individualism to totally stifling collectivism and adjust to optimize their chances of success both as an individual and as a group.  Success seems to lie in the middle.   The aim for our nation is clear.  It is to provide a level playing field by putting America first so that all citizens can enjoy life, liberty and pursuit of happiness to the fullest extent.  It is up to the leadership to develop the right strategies and execute them with right combinations of culture and structure to achieve the aim of the system by “making life better for everyone”.  It is up to the citizens to put the right leadership in place by voicing their approval or disapproval at the ballot.  Thanks to the wisdom of our founders, our democracy allows a self-correction process to adjust our national DNA.  Are we wise enough to choose the right leaders who will put America first?  Recent elections seem to show that most of the citizens are fair minded and want to choose the middle path.  Now it is up to our leaders to show that they can lead by putting America first.

References:

[1]   Deming, Systems Thinking, Organizational DNA and Putting America First – Part I

[2]  W. Edwards Deming, “The New Economics for Industry, Government, Education (Paperback), First MIT Press Edition, 2000.  (Also reproduced at http://deming.org/index.cfm?content=66 )

[3]   Mary Walton, and W. Edwards Deming, “The Deming Management Method”, The Berkeley Publishing Group, New York, NY

[4]  http://www.dnaglobalnetwork.com/

[5]  Kabuki Theater, National GDP, Disruptive Innovation and Japanese Business Conundrum

[6]  Earley, P. C., and Gibson C. B., “Taking stock in our progress on individualism-collectivism: 100 years of Solidarity and Community, Journal of Management, 1998, Vol. 24, No. 3, 265-304

[7]  Robert J. Ballon, “Human Resource Management in Japan”, Issue 23 (Vol. 12, No. 1), June 2002, pp. 5-20.  Robert Ballon is a professor Emeritus in Sophia University, Tokyo.  He has written many articles and books on Japanese management, role of individualism and collectivism in business management.  His lectures inspired me to write my thesis under his guidance in 1990 titled “Current Issues in Japanese Management – “Is Japanese Software Thrust As Powerful As Their Hardware Thrust?”

[8] Chao C. Chen, Xiao-Ping Chen and James R. Meindl , “How Can Cooperation Be Fostered? The Cultural Effects of Individualism-Collectivism, The Academy of Management Review
Vol. 23, No. 2 (Apr., 1998), pp. 285-304 

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Acquisitions, Innovation and the Economics of the Invisible Hand

28 08 2010

“HP raises offer for 3PAR again – to $2 billion” – This headline reminds me of a similar one in the year 2000, the peak year of the Internet bubble when another over-valued acquisitions was touted as a strategic move.

“Nortel Networks to Acquire Alteon WebSystems for US$7.8 Billion – Will Establish Leadership Position in Delivering High-Performance Internet Data Centers for the New Networked Economy”

The acquisition was to “enable Nortel Networks to build the next generation Internet data center – capable of delivering content at unprecedented levels of speed, efficiency and reliability. Nortel Networks will be in a position to offer a complete Internet data center solution by integrating Alteon WebSystems’ content aware switching products with Nortel Networks’ service offerings in storage, gigabit switches, professional services, hosted application management/delivery and caching.”

A decade later, Nortel, a $78 stock company in 2000 is struggling to survive today as a penny stock company.  Lucent, once known for the famous Bell Labs innovation is no more.  Sun Microsystems suffered a similar fate after the acquisition of Storage Tek until it was acquired by Oracle.

Today, most successful cloud operators Amazon, Google and Microsoft do not use 3PAR storage solutions.  In fact the cloud provider storage strategy, to meet the scaling and cost constraints that are demanded by wildly fluctuating consumer market, abandons the expensive storage appliance solutions that are management intensive albeit through a single console.  Resource centric storage solutions from EMC, HDS, SUN are being abandoned by these cloud providers with a preference to simpler application specific management solutions using commercially off-the-shelf storage. Andrew Reichman from Forrester Research argues that application centric management really makes SAN and storage solutions of yester year obsolete.  Companies such as Amazon, Microsoft, RightScale and Sclr are delivering the application centric reliability, availability, performance and security management to meet the need of even mission critical applications on public clouds.  Many enterprises are mimicking the success of public cloud providers in their own private clouds.

It is interesting to note that the HP EVA storage product line directly competes with 3PAR products.  Does it mean that EVA storage is not good enough for the market?  or HP wants to block DELL from acquiring competitive storage? Also perhaps, 3PAR’s single console management solution may assist DELL in complimenting their solutions more than HP with their redundant systems both home-grown and acquired.  But is it worth the cost for a company that is alleged to be not profitable since it went public?  

The new Intel and AMD multi-core, multi-CPU chips with hardware assisted virtualization add another level of  disruption that will transform the way we compute on a massive scale using the cloud.  One server from Seamicro with 512 CPUs inside will alter the economics drastically with space and energy savings.  Same chips will provide virtualization both in data centers and mobile devices.  These new innovations make the special purpose expensive custom chip designed storage appliances obsolete pretty soon.  As storage, networking and computing become commodity, the cloud providers will migrate to commercially off-the-shelf hardware which will drastically curtail the services business that HP, DELL and 3PAR depend upon today.  Server virtualization makes storage clusters and point to point replication obsolete using application-centric live migration.  What the big companies with cash can do to improve the economy is to invest in future innovation following Intel and Apple instead of buying old technology from Palm and 3PAR. In the meanwhile, the next generation Internet Data Center will continue to evolve leaving many casualties in its wake and rewarding companies that invest wisely to foster innovation instead of indulging in financial gymnastics that add no value.  Will the companies that invest in technology innovation with paradigm shifts such as Apple always survive and companies that invest their cash in Greek Bonds or acquisitions at any cost, follow the path of Nortel?





Are the Short-Term Profit Motives and Wall Street-like Investing under the Influence, Trumping Long Term Innovation in the Silicon Valley?

6 06 2010

 

When the Wall Street gets drunk, the tax payers get a collective hangover [1].  When Silicon Valley Venture Capitalists start investing in coffee shops in India [2], will the entrepreneurs, who are this country’s best hope in creating jobs, get a severe migraine?

According to Joseph Schumpeter, the patron saint of innovation, entrepreneurs are the agents of innovation and creative destruction.  With their creative and restless quest for new approaches, they displace old products and processes with better ones often causing massive disruption to the equilibrium of economic tranquility.  The Silicon Valley Venture Capitalists institutionalized the process of creative destruction by developing the financial backbone and the economies of scale to overcome the associated risk.

According to Wikipedia “A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital (thereby differentiating VC from buy out private equity firms which typically invest in companies with proven revenue), and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one’s investment in a given startup company. As a consequence, most venture capital investments are done in a pool format where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start-up firm.”

However, it seems that all is not well in the Silicon Valley.

“What’s intriguing is how that strategy has evolved, and where U.S. Venture capitalists are finding the big wins.  Forget the next iPod, or Facebook.  The firms succeeding in India are doing so with some very un-Silicon Valley-like investments.  Think toll roads.  Think coffee shops.  Think insurance companies.” 

These remarks from Chris O’brien [2] sound very alarming given the raison d’être for  venture capital firms is to invest in long-term high-risk high-gain strategies and not conventional short-term profit-making ventures.  According to Answers.com, the venture capital is money made available for investment in innovative enterprises or research, especially in high technology, in which both the risk of loss and the potential for profit may be considerable. 

Unfortunately, it seems that the current day VCs, while considering themselves as the high-priests of innovation, are not only not able to identify “novel technologies that have potential to generate high commercial returns”, but also they are plundering valuable investment capital available to them with substantial tax advantages compared to other investment firms, by looking at coffee shops and toll-roads in India for profits.

“Many VCs say their specialized financial industry merits special treatment in the private equity field because it makes long-term, high-risk investment vital to job creation.”  With this observation, Scott Duke Harris discusses current efforts by the venture capital firms to fight current government efforts to change the way the “carried interest” fee is taxed [3].

It is a good time to examine the relevance of the VC firms and their compensation in the times of large unemployment, dwindling resources and severe pay cuts elsewhere.  Where is the capital best utilized? Is it in creating innovation and paradigm shifts in the US or in coffee shops in India even with high profits?  How is a VC different from other investment firms looking for high return?

Why Does Innovation Matter?

The following extract from David A. Hounshell [4] clearly explains not only why innovation matters but also differentiates the impact of creative destruction from the conventional competitive capitalism.

“So why is innovation important? One way to answer this question is to go back to a classic paper published in 1957 by Robert Solow, an economist at MIT, entitled “Technical Change and the Aggregate Production Function” (Review of Economics and Statistics ). Solow was one of the first major economists of the postwar period to examine technological change seriously. In this paper, he studied the sources of productivity growth, looking over U.S. history, and concluded that when he accounted for all the increases in land, labor, and capital inputs and overall productivity growth, only about 40 percent of this growth could be explained with conventional economic input factors. Less than half of the productivity growth in American history could be accounted for through normal means—i.e., the means employed under competitive capitalism in Schumpeterian terms. The other 50-60 percent of productivity growth has come to be known as the “Solow residual.” Solow argued that technological change essentially constituted this residual. Technological change—distinct from simple increased inputs of land, labor, and capital—thus was a principal source of economic growth. This phenomenon in economic growth had not been formally recognized by any economist to date, although had Schumpeter been living in 1957, he surely would not have found Solow’s conclusions surprising.  Schumpeter would have said, “yes, this residual is a measure of the product of the perennial gale of creative destruction, which stems fundamentally from innovation.” Solow won the first Nobel Memorial Prize in Economics for his work, which has become a basic building block of economists’ work in economic growth theory ever since.”

The technology of creative destruction requires an entrepreneur with vision, tolerance for high risk and a thick-skin to keep persisting against all odds in an environment of competitive capitalism that attempts to suppress drastic changes to the status-quo.  The S-curve shown in figure 1 describes the three phases of innovation characterized by the return on investment.

The incubating phase where the return on investment is almost zero can only flourish with investments that have a high risk-tolerance.  Traditionally, Government institutions, universities and some large companies with vision and long-term focus have participated in developing and incubating ideas that are considered as a long-shot.  Occasionally, rich patrons who have made their money in traditional ways have indulged in incubating technologies.   On the other hand the VC’s are interested in the emerging technologies because the technologies show promise of creative destruction and associated big profits that could result from changing the game.  In order to compete with the status-quo that will attempt to stifle emerging technologies that threaten their profits, and to create the eco-systems that are required to scale and demonstrate the value of the new paradigm, the entrepreneur needs  investment, expertise and the global access that organized investment by the VC community brings.  In the past, the Silicon Valley VCs played that role very successfully with the right bets on disruptive technologies.  However, as the rising tide of their success floated all boats and created a new generation of VCs, the tide seem to have changed from emphasis on vision, disruption, and 10X improvements in productivity to incremental gains, less risk, and dubious business models such as the one that gives free software supported by labor and knowledge intensive human services that have proven not to scale time and again. 

The return on investment to improve mature technologies is poor.  Process improvements bring mostly incremental improvements in deploying mature technologies.  Investment in coffee shops brings returns not through investment in disruptive new technologies, but through process improvement to squeeze the profits or through clever marketing. Investment in coffee shops belongs in conventional competitive capitalism.  In a society struggling for resources, one precious VC dollar spent on coffee shop in India is ten dollars not realized in creating new jobs in US.  Would it not be better if investment in coffee shops is best left to Starbucks and McDonald?

Communication, collaboration and commerce at the speed of light, today, enabled by the very same technology innovation has created a new order in investment community.  Short term profit incentives, appetite for instant gratification fostered by a casino-like real-time investment in Wall Street, a twitter influenced culture of management with superficial knowledge, short-attention span of VC community and profit-at-any-cost investment culture are all contributing to the diminishing of long-term focus, innovation and civic responsibility. 

Investing in coffee-shops and toll roads in India is the last desperate leap from creative disruption to conventional capitalism in search of quick-profit.  Is this what the investors in VC firms are looking for and are the compensation and tax incentives congruent with the VC mission?  Are the same factors that created Enron, sub-prime mortgages and innovation in financial instruments now influencing the Silicon Valley VCs?

Food for thought!

References

[1] Metooeconomist, “An Inquiry into the Nature and Causes of the Collective Hangover of Tax Payers, When Wall Street Gets Drunk” (https://metooeconomist.wordpress.com )

[2] Chris O’brien , “Changing focus in India:  Deals downshift from tech to ordinary living”, San Jose Mercury News, Sunday May 23, 2010

[3]  Scott Duke Harris, “Uncle Sam eyes bigger slice of VC”, San Jose Mercury News, Friday, June 4, 2010

[4]  David A. Hounshell, “Innovation and the Growth of the American Economy”, The Newsletter of FPRI’s Wachman Center, Vol. 14, No. 3, February 2009 (http://www.fpri.org/footnotes/1403.200902.hounshell.innovationamericaneconomy.html )