How do we apply Deming’s profound knowledge vis a vis our Congress?

6 08 2011

Extreme Politics with Communication, Collaboration and Commerce at the Speed of Light

A reader of my blog writes:

“Since the elected officials do not share the same goals or theories of knowledge they do not act like cooperating players in a system with a common vision or goal. Instead they behave as adversarial players trying to get the best deal for themselves and their patrons (or sponsors who lobby for their causes) at the expense of others. Current shared goal among all the players seems to be convincing the voters that their side is right, so that they can impose their views on all voters.  How do we apply Deming’s profound knowledge vis-a-vis our Congress?”

A good question.

Deming’s approach is based on developing a consensus based on facts supported by measurements.  The first step in a collective consensus building approach is to show respect to each other.  Do not blame people.  Blame the process.  This is a learned skill.  This has to be accepted and observed and when people violate this rule, they should be called out and reminded to observe respect toward each other.  Without this acceptance, there will be no meaningful dialogue except noise.  If a Vice President of the country calls (or condones when others do it in his presence!) other members of congress terrorists, he is not showing respect.  If a member of congress questions the patriotism of the President, it is not showing respect.  Showing respect and cultivating the ability to argue one’s point of view to convince the other is a learned skill.  Old tricks of political demogaugory no longer work in the age of communication at the speed of light.  Politicians will be immediately exposed in 24X7 multi-media in living color.  Our corporate leaders went through the same transformation from being disrespectful noisy authoritative self-centered managers to becoming consensus building visionaries developing common goals and mission with Deming’s approach.
When Deming arrived at Ford, the management at Ford resembled today’s U S Congress and the Executive Branch – highly polarized, bickering, undermining each other’s efforts and totally ignoring what their customers were saying [1]. To Ford management’s surprise, Deming did not focus on quality but scolded the management for being mainly responsible for 85% of the problems in developing better cars. Before Deming, Ford management paid only a lip service to quality [1]. The incentives and appraisal systems, which were intended to motivate people to do a good job, were cost-oriented, not quality oriented. As a consequence, people who wanted to be successful had no reason to collaborate across divisions and focus on end-to-end process and product quality. At the top levels, the bickering, back-biting and self-promotion were so prevalent that they had to bring in a facilitator to mediate at management meetings and to bring focus back to issues on hand. Deming’s success at Ford is well documented [2, 3] in the literature and “the system of profound knowledge” describing the fourteen key principles for management and the “Seven Deadly Diseases” which must be addressed by the management are well articulated in Deming’s book [4]. There is no shortcut to developing leadership skills.  Education, training and experience are essential to polish our leaders.  Perhaps every elected official should undergo a three-month education on Deming’s profound knowledge before they take the oath to serve the people who have trusted them to do the right thing.

It is important to remember that when the resources are abundant, some waste in the system is tolerated but in a competitive world where communication, collaboration and commerce are conducted at the speed of light, resources become scarce, and waste is not tolerated by the system.  It behooves the leaders of this great nation to focus on competing with the rest of the world instead of fighting with each other on their ideologies that are only marginally different.  A majority of citizens probably favor fiscal conservatism and social liberalism.  If one cancels the noise from the left and the right, the majority agrees that we should first cut waste, live within our means, then reform the tax system to make it fair, and provide a social net.  If leaders do not listen to their customers (in this case the citizens), they will vote them out.  A leader’s reponsibility is to develop consensus with a vision for the future.  It is not to expoit fear to cause a riot to promote their views!

One easy way to fix the current stalemate of extreme liberalism and extreme conservatism is to elect republicans who will promise to reform tax code to be fair and elect democrats who want to cut spending.

Democracy  (Aristotle classifies democracy as a deviant constitution (albeit the best of a bad lot),) works well when everyone pitches-in toward a common purpose and the leadership role is to define and develop a common purpose based on consensus and will of the people.

References:

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

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

[3] Womack, James P., Jones Daniel T, and Roos Daniel, “The Machine That Changed The World”, Free Press, 1990

[4] Deming, W. Edwards, “Out of the Crisis”. MIT Press, 1986.





Organizational DNA, Disruptive Innovation, Economics at the Speed of Light and the Impact on Investment in Future

4 12 2010

Marye Anne Fox, National Medal of Science Winner (2010) and Walter Kohn, Nobel Prize in Chemistry Winner (1998) at a recent UCSD 50th Anniversary Celebration

Abstract:

The economics of communication, collaboration and commerce at the speed of light is changing the global competitive landscape by leveling the playing field in product leadership, operational excellence and customer intimacy through commoditization of technologies. The only choice open for nations to be number one is to bring disruptive innovation to differentiate.  Time and again, evolution has proven that architectural simplification through disruptive innovation brings orders of magnitude productivity. Life forms survive and thrive by changing their DNA and adapting to external changes.  Will the differentiation in the future for an organization come from investing in disruptive innovation? 

Introduction:

A nation’s vibrancy is often, visible in the halls of its learning institutions.  It was most visible recently at the 50th anniversary of University of California, San Diego whose chancellor, Marye Anne Fox, was awarded the national medal of science by President Obama just a day before.  Many of the old alumni and faculty were invited to celebrate the 50th anniversary.  Walter Kohn, a card-carrying physicist who won a Nobel Prize in Chemistry in 1998 was there.  There were talks about the origins of the university and now legendary Roger Revelle [1] “whose dream it was to establish a great institution of learning and recruit world-class scientists to come and join its faculty — for their names lured other outstanding people to come. And their prestige attracted money for research grants and superior students to enroll.  At one time UCSD’s faculty had eight Nobel laureates and 50 members of the National Academy of Sciences.  Revelle hoped to desegregate the sciences and the humanities and social sciences, because of the profound effect of technology and scientific discovery upon all aspects of modern society.”  Starting from its humble beginnings as UC La Jolla, UCSD today has grown to encompass six undergraduate colleges, five academic divisions and five graduate and professional schools. 

Equally visible were the protests from the students on recent 8-percent student-fee increase from $10,302 to $11,124 for the 2011-12 academic year, which comes a year after a 32-percent increase passed last November.  The increase is proposed because of the decline of California state budget allocated for supporting education.  “What does it say about any state that focuses more on prison uniforms than on caps and gowns?” Schwarzenegger [2], the governor of the state of California said recently, adding that “30 years ago, 10 percent of the general fund went to higher education and 3 percent went to prisons. Today, almost 11 percent goes to prisons and only 7.5 percent goes to higher education. Spending 45 percent more on prisons than universities is no way to proceed into the future.” The state’s priorities, he added, “have become out of whack.”

State and national priorities on where they invest become a critical issue in a globally competitive market place where nations fiercely compete for their market share.  In an Internet connected global economy where communication, collaboration and commerce are conducted at the speed of light, the national boundaries have blurred with respect to competition in the market place.  Technology innovations propagate rapidly and products and services get commoditized globally seeking cheap resources and customer demand.  Global corporations in their quest for profits, in a competitive environment with profit margins under constant pressure, are no longer sensitive to a nation’s local economics.  The invisible hand of economics that establishes equilibrium in a free competitive market place cannot cope with rapid fluctuations introduced by the communication, collaboration and commerce conducted at the speed of light [3].  For example, cheap labor in a particular sector of economy may transfer jobs very rapidly from one nation to another but the laid off workers cannot move with the same speed from one sector to another or one nation to another.  The time scale disparities of economic cause and response have diverged so much, with the advances in technology,  that the non-equilibrium economics becomes the norm and all the economic theories that address equilibrium and small deviations from equilibrium become the exception.  How can nations cope with this side effect of technology advances that also have improved productivity and quality of life for everyone?

The answer may lie in understanding the organizational DNA that assists in developing patterns of evolutionary advantage and competitive differentiation.

Organizational DNA, Disruptive Innovation and the Culture of Game Changers

According to a new management theory [4, 5, 6, and 7] organizations evolve developing their own DNA which contributes to their business success.  Four following base elements constitute the organizational DNA:

  1. Leadership
  2. Strategy
  3. Culture and
  4. Organizational structure

Very similar to the DNA of biological systems, the organizational DNA consists of different patterns combining the base elements and some patterns have evolutionary advantage over others that promote competitive differentiation and survival.  These successful patterns define how leadership implements  the four strategies exploiting the cultural diversity and different management structures.  The four strategies identified as primary drivers for success are:

  1. Customer intimacy,
  2. Operational Excellence,
  3. Product Leadership and
  4. Disruptive innovation.

Each strategy, the theory claims, has evolved different combinations of cultural traits and organizational style for its successful implementation.  One combination that works well for implementing one strategy may be not optimal if not fatal for implementing another strategy.  By successfully exploiting the right combinations of strategy, culture and structure, leadership manages to develop competitive differentiation in the open competitive market place to assure long-term survival and sustenance. 

In particular, the disruptive innovation as a strategy to provide competitive differentiation requires a culture of cultivation and an organizational structure that promotes collaboration between technical functional organizations that bring technical competence in multiple disciplines and business and marketing organizations that have a pulse of the market drivers.

If the theory has any validity, it has profound implications on how we approach innovation and exploit our halls of learning to be number one as a nation. 

Disruptive innovators or game changers are different breed of people who cause technological change —distinct from simple increased inputs of land, labor, and capital— which contributes to great leaps in economic growth.  As another Nobel Prize winner Solow pointed out, about four-fifths of the growth in US output per worker was attributable to technical progress [8].  On the other hand “a generation of scholars had arduously and systematically documented empirical evidence that supported the conclusion of Joseph a Schumpeter’s [9] “What we have got to accept is that the large-scale establishment or unit of control has come to be the most powerful engine of progress and in particular long-run expansion of the output.”  John Kenneth Galbraith [10] provided a postwar interpretation:  ‘There is no more pleasant fiction than that technological change is the product of matchless ingenuity of the small man forced by competition to employ his wits to better his neighbor.’”

The organizational DNA theory reconciles the observations of Solow, Schumpeter and Galbraith by pointing out that all four strategies with associated patterns are equally important for evolutionary success.  The disruptive innovation cultivated by individuals needs both technical competence and market savvy to translate into product leadership which then has to scale to sustain through operational excellence and customer intimacy.  This means that the entrepreneur and unit production cost reduction through large-scale are both essential for evolutionary success.

The cycle of product and technology maturity is described by the S-curve shown in figure 1 which describes the three phases of evolution and associated return on investment.

S-Curve depicts the evolution of technology/process innovation and associated productivity enhancements

Three important points need emphasis:

  1. Technology or process innovation that improves productivity evolves through three distinct phases (incubating, emerging and mature) which have different returns on investment.  Disruptive technologies that raise the productivity from one level to a next higher level occur through evolutionary need for competitiveness. Traditionally, as technologies start to mature, governments and corporations have devoted a part of their revenues (taxes or profits) in incubating technologies as an investment to their future competitiveness and survival.  History has shown that this investment is about 3 to 6 percent of their revenue.  History also has shown that such investment attracts the creative scientists and engineers to nurture the culture of cultivation and structures that collaborate (without the near-term profit oriented cut-throat competition) and go on to achieve Nobel  prizes  and National Science Awards.  DARPA and NSF funded projects, UCSD and AT&T Bell Labs are just a few examples.  Incubating technologies require expertise in multiple disciplines and collaboration which Roger Revelle emphasized when he was advocating the need for a university.  His main concern was that for Scripps Oceanography Institute to be successful, it needed multi-disciplinary expertise of highest quality available nearby.
  2. When the incubating technologies start to show promise as emerging technologies, the Animal Spirits and Venture Capitalists start smelling high profits and exploit entrepreneur’s product development expertise and establish product leadership.  The culture and structure required for this phase according to the organizational DNA theory is different from the culture of Nobel Laureates and structure of collaboration required from many disciplines.  
  3. As the products, processes, services  and technologies prove themselves in customer environments, conventional capitalism kicks in and large corporations exploit scale through establishing operational excellence and customer intimacy.  Again the organizational DNA theory emphasizes that the culture and structure that is exploited by conventional capitalism are different from the cultures that support disruptive innovation and establishing product leadership.  The culture of control that helps in establishing operational excellence fails miserably in creating disruptive innovation.

The long and short of the theory is that the patterns of evolutionary advantage are different in supporting different phases of implementing productivity improvements and establishing competitive differentiation.

Organizational DNA and Impact on Investment in Future of a Nation

Communication, collaboration and commerce at the speed of light have changed the global market place and both corporations and nations are struggling to establish a new economic equilibrium where they need to respond to establish competitive differentiation in a level playing field.  Global connectivity and instant information access has allowed strong coupling between minor changes in global supply and demand to cause large fluctuations in price of goods and services.  Instance arbitrage and risk management at the speed of light have introduced large fluctuations in the economic equilibrium that classical economics of the invisible hand does not address.  In addition, as the technologies get commoditized also at the speed of light crossing corporate and national boundaries, operational excellence and customer intimacy that are the hall marks of conventional capitalism [11]  can no longer provide competitive differentiation due to global competition and strain on profit margins.  This leaves disruptive innovation and product leadership in bringing new innovations speedily to market as the only options for corporations and nations to differentiate themselves.  Corporations and nations that successfully exploit these strategies with right combination of strategy, culture and structure will have an evolutionary advantage over their competitors.

During the past three decades, as conventional capitalism has thrived based on past investments in R&D, more universities, and corporate R&D efforts have been hijacked by the short-term profit motives at the expense of long-term investment that can yield disruptive innovation.  Professors have become entrepreneurs and VCs have moved to conventional capitalism by investing in coffee shops and toll roads in India [12].  This has resulted in dismantling national assets such as Bell Laboratories and engineering professors in universities focusing on their own side businesses than educating, collaborating and conducting research.  This is further exacerbated by the state and national governments diverting funds from education to prisons and pension plans for government employees.  As the recent scandals of for-profit universities demonstrate, educators are also getting drunk with short-term profit motives causing a national hangover for the tax payers [3].

If the organizational DNA theory has any merit, as a nation, it behooves us to revisit our halls of learning and reexamine our investment priorities to reestablish right strategies that are aligned with successful evolutionary patterns.  It is important to emphasize that the four strategies mentioned require different patterns of culture and structure and wrong combination may lead to a dead-end in the struggle for survival in a competitive market place controlled by the new economics of the invisible hand at the speed of light.  If there is a lesson from the organizational DNA theory for the VCs, business leaders and our legislators who are the high priests that control our investments and our future with their decisions, it is to learn that the Research and Development investments which influence conventional capitalism serve a different purpose from the investments which influence the entrepreneurs and the disruptive innovators.  They have a social responsibility to use right incentives to balance the short-term profit motives and the long-term investments towards a better future for the system as whole.  Assembling teams with right culture and structure to execute the right strategy is key to successful evolution of the system as a whole as Roger Revelle strived to do.   As we have seen recently, a few high priests can get drunk in the Wall Street [3] and cause a collective national hangover for the tax payers in a connected world at the speed of light.

After all, as Deming said “What we need to do is learn to work in the system, by which I mean that everybody, every team, every platform, every division, every component is there not for individual competitive profit or recognition, but for contribution to the system as a whole on a win-win basis.” [13].  The evolution of DNA in biology attests to this dictum. Survival depends on system thinking.  The selfish gene over time has learnt to collaborate for its survival [14].  The organizational DNA theory suggests that there is a time and place for collaboration and a time and place for cut-throat competition.  Successful DNA exploits both to its advantage.  Perhaps the organizational DNA theory is worth paying attention to.

References:

  1. http://www.sandiegohistory.org/bio/revelle/revelle.htm
  2. http://www.newsweek.com/2010/06/28/classrooms-or-prison-cells.html#
  3. An Inquiry into the Nature and Causes of the Collective Hangover of Tax Payers, When Wall Street Gets Drunk
  4. http://www.dnaglobalnetwork.com/
  5. Deming, Systems Thinking, Organizational DNA and Putting America First – Part II
  6. Deming, Systems Thinking, Organizational DNA and Putting America First – Part I
  7. Kabuki Theater, National GDP, Disruptive Innovation and Japanese Business Conundrum
  8. David B. Audretsch, Max C. Keilbach, Erik Lehmann, “Entrepreneurship and economic growth”, Oxford University Press, 2006
  9. Schumpeter J, “Capitalism, Socialism and Democracy”, Harper and Brithers, New York, 1942
  10. Galbraith, J. “Economic Development in Perspective”, Harvard University Press, 1962
  11. Can Cisco Sustain Competitive Differentiation on Operational Excellence Alone?
  12. Are the Short-Term Profit Motives and Wall Street-like Investing under the Influence, Trumping Long Term Innovation in the Silicon Valley?
  13. http://thinkexist.com/quotes/w._edwards_deming/2.html
  14. Dawkins, R. (1989). The Selfish Gene. In R. Dawkins, The Selfish Gene (p. 23). New York: Oxford University Press.




Can Cisco Sustain Competitive Differentiation on Operational Excellence Alone?

24 11 2010

Cisco, a quintessential Silicon Valley innovator which had its beginnings in 1984 with its internetworking multi-protocol routers, has become a global leader with its dominance in global networking products.  Since 1995, when John Chambers took the helm as the CEO, Cisco has taken the acquisition route to bring innovation and expansion with an operational excellence that is second to none [1]. However, more recently, Cisco has found itself becoming more as a commodity product company with a competitive squeeze on its margins and missing on two disruptive innovations that are changing the network services landscape namely mobile computing and cloud computing.   In order to catch up, it has tried to partner with VMWare, a pioneer in virtualization technology that is driving the cloud computing revolution.  With its operational excellence, Cisco has been able to integrate its networking products with Virtualization to get an entry into enterprise cloud market.  However, Cisco is facing competition from three fronts:

  1. Virtualization has altered the networking product landscape by moving networking hardware services into software as Vyatta is doing by offering software based virtual routers [2].  As data centers are upgraded to take advantage of new generation of multicore processors with 10X performance improvement, hardware assisted virtualization, space, power and management savings, Cisco’s current product strategies will be challenged by competing disruptive innovation in the private, public and hybrid cloud markets [3].  As data centers start deploying servers with large number of multicore processors, networking technology migrates to inside the server connecting virtual computers forcing a new product strategy for internewtworking.
  2. Chinese companies such as Huawei are bringing competition in traditional Cisco telecommunications service provider market on a large scale by acquiring American Technology by hiring many laid off Silicon Valley experts from companies such as SUN and using cheaper engineers and lower production costs in China
  3. As Cisco moves more toward consumer and small and medium business market with products such as video conferencing and commodity networking products, it faces competition from many other vendors reducing its profit margins.

Can Cisco continue its double digit growth that has been its strength depending on operational excellence alone?

The answer may lie in examining how companies sustain long term competitive differentiation.  A new theory on organizational success claims that certain combinations of leadership, strategy, culture, and organizational structure have an evolutionary advantage over others [4].  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 [5, and 6]. 

Figure 1 shows the business stakeholders and various strategies that have proven to be successful.

Organizational DNA and Strategies with evolutionary advantage

The leadership has to manage the organizational structure and develop a culture among various groups that suit the strategies as shown here; For example, in order to succeed in developing disruptive innovation, leadership must foster a culture of cultivation that is nurturing and an organizational structure that brings both business and technical organizations to work together as a matrix to exploit customer intimacy and technical leadership.  The same organization, in order to foster operational excellence must assemble a team with a culture of control with a strict hierarchical organizational structure.  The consequences of this theory to various companies and even to nations are discussed in my blogs [5 and 6].  An organization may choose to become a leader in both disruptive innovation and operational excellence by assembling different teams in its organization or focus on one strategy.  In the past, AT&T succeeded in developing both using Bell Labs and its Operating Telephone Companies.  IBM did it with its Research Labs and its services offerings.  Today, Intel and Apple seem to have mastered all four strategies successfully.

In the past Cisco has successfully depended on acquisitions to complement their lack of great R&D in-house.  Only time will tell if this strategy will prove to bring same success in the future?  Obviously, same acquisition options are available to its competitors as well, and companies such as Huawei seem to be successfully exploiting them with their big purses. 

The economics of communication, collaboration and commerce at the speed of light levels the playing field in product leadership, operational excellence and customer intimacy, and Chinese and Indian companies with their cheaper human resources and lower production costs can successfully compete with companies such as Cisco by hiring the right expertise.  They will be more Cisco’s competitors to become number One; After all, there is room at the top for only one number One.  As everyone starts to battle in establishing product leadership, operational excellence and customer intimacy using same technologies that get commoditized, only choice open for companies to be number one is to bring disruptive innovation to differentiate.  Time and again, evolution has proven that architectural simplification through disruptive innovation brings orders of magnitude productivity. Life forms survive and thrive by changing their DNA and adapting to external changes.  Will the differentiation in the future come from organizing to excel in disruptive innovation?  What will Cisco do?

References:

[1]   http://www.fundinguniverse.com/company-histories/Cisco-Systems-Inc-Company-History.html

[2]   Does the New “Virtual Network” Spell Sunset to the Heterogeneous Physical Network Infrastructure as We Know in Today’s Data Centers?

[3]   Is the Network-centric Computing Paradigm for Muti-core, the Next Big Thing?

[4]  http://www.dnaglobalnetwork.com/

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

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





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 





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 )