Scale matters. But when and how? For a time the theory of capitalism rested on the belief that in a competitive process large-scale capitalism always beats out the smaller counterpart. Among the first to articulate this view was Marx: "The battle of competition is fought by the cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the large capitals beat the smaller." Although the intellectual antecedents of "giantism" can be found in Marx, the theory of capitalism in the West as represented by Schumpeter, Galbraith and others in the 1950s and 1960s, also proclaimed the invincibility of the large firm. The concentration and centralization of capital leads to economies of scale, which in turn leads to the highest levels of productivity growth. Schumpeter, for example, wrote in 1942 that "What we have got to accept is that (the large establishment or unit of control) has come to be the most powerful engine of progress."
The thesis of giantism has proven to be economically suspect and historically unsound. Indeed, the pendulum has swung so far the other way that today "innovation" has become synonymous with entrepreneurship and the latent ingenuity in small firms. According to today's conventional wisdom it's the entrepreneur and the small business owner that innovates. By contrast large firms are inherently bureaucratic and sclerotic. Clayton Christensen in The Innovator's Dilemma has made the further point (in Hegelian fashion) that the very logic that drives incumbent firms to success later generates the seed of self destruction. Is there no hope then for large firms?
Prahalad and Krishnan's The New Age of Innovation is not an apologia for large-scale capitalism. However, it is one of the few recent books on innovation that approaches the problem synoptically and comprehensively. It can be read by firms small or large as a primer on innovation strategy. Their starting point is the claim that "traditional sources of competitive advantage, such as access to capital, physical location, and raw materials or technology, will become table stakes. These factors are diminishing in their importance as sources of competitive advantage. Access to these factors is becoming easier."
Value creation and new competitive advantage derive from a set of factors which Prahalad and Krishnan portray pictorially as a house. The two pillars are labelled as "N=1" and "R=G". N=1 asserts that "value is based on unique, personalized co-created experiences of customers" while "R=G" means that successful firms will draw on, though not necessarily own, ideas, talents, and resources globally. In addition to these two pillars an innovation strategy integrates business processes, analytics, technology, and social architecture. The individual elements in Prahalad and Krishnan's model are not new but their synthesis is original. Large firms need not throw in the towel just yet.
An Associate Professor of National Security Affairs at the Naval Postgraduate School, Zachary Shore draws on literature, culture, history and politics to illustrate seven common "cognition traps". You will recognize many of these in your own organization:
Exposure Anxiety: fear of being seen as weak
Causefusion: confusing the causes of complex events
Flat View: seeing the world in one dimension
Cure-Allism: thinking that one-size solutions can solve all problems
Infomania: an obsessive relationship to information
Mirror Imaging: thinking the other side thinks like you do
Static Cling: the refusal to accept that circumstances have changed
Reading Blunder I was drawn to re-reading George Orwell's classic essay "Shooting an Elephant". Exposure anxiety is a "perennial plague upon those in positions of power". Shore does a fine job of limning the underlying psychology of exposure anxiety by using Orwell's essay among his examples. Instead of pursuing a course of action commensurate with the the problem at hand or simply admitting that we don't know the solution, we fall prey to bravado. Orwell is led inexorably to shooting an elephant in front of hundreds of Burmese because he wants to avoid looking weak or a fool. This despite the fact that he does not want to shoot the elephant and knows exactly what he ought to do.
Dissecting Citigroup's fiasco in the coming months I am sure will reveal many of Shore's cognition traps. The most likely one to emerge in Citigroup's case is what Shore calls "Infomania", an example of which is information avoidance. Citigroup's risk managers failed miserably to follow-up and investigate the bank's vulnerabilities, relying instead solely on the word of a senior executive. According to NY Times reporters Eric Dash and Julie Cresswell, "Normally, a big bank would never allow the word of just one executive to carry so much weight. Instead, it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses. But many Citigroup insiders say the bank’s risk managers never investigated deeply enough."
I have two minor criticisms of the book. First, blunders are always obvious in retrospect and even more so to someone looking in from the outside. Shore does a good job of classifying blunders but only hints at how to avoid them. But this is not a shortcoming of Shore's fine book. Shore has given us a taxonomy to work with. It's up to us to investigate and to put in place both personal and organizational "checks and balances" to avoid catastrophic decisions. Second, it would be shame if readers avoided the book because of the cutesy category names ("Causefusion", "Cure-Allism"). Blunder is a well written book and its numerous case studies are worth studying.
I have started reading Michael Cusumano's "The Business of Software". Its starting premise (software is not like other businesses) might be obvious, but there are very few management books out there that get at some of the subtleties and differences of the software business. Cusumano is SMR Distinguished Professor at MIT's Sloan School of Management.
"In how many businesses does making one copy or one million copies of your product cost about the same? How many businesses have up to 99 percent gross profit margins for their product sales? In how many businesses do many products companies eventually become services or hybrid companies (that is, providing some customization of product features and technical services such as system integration and maintenance), whether they like it or not? In how many businesses is there frequently a ten- or twentyfold difference in productivity between your best employee and your worst one? How many businesses tolerate some 75 to 80 percent of their product-development projects routinely being late and over budget, with 'best practice' considered to be 20 percent on time? How about a company where the people who build products often consider themselves artists rather than scientists or engineers and have the mercurial temperament to go with it? In how many businesses are customers 'locked in' to a particular vendor because of product decisions someone made a decade or two ago that can't easily be reversed?"
I have just started reading Joel on Software by Joel Spolsky, who also maintains a web log. It's ostensibly for "software managers" who need to guide development projects. But it's a must read for CIOs and anyone who manages IT.
Witty, irreverent, and chock full of insights. I am buying a copy for all my managers. The first couple of chapters alone are worth the price of admission.