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Realignment and Echoes of the Past

May 22nd

The idea that the Internet has transformed business and created a global economy is an assertion that is   often repeated in the media today.  Yet there is little consideration given to the implications of the global supply chains for national futures.

The echoes of the cold war could be heard this week as China and Russia announced their gas deal.  Russian economic stress has been a theme that has appeared with increasing frequency in recent months .

And then the gas deal – with its apparent economic benefits for Russia and its obvious geopolitical implications for everyone – was announced.  Interestingly the announcement followed a military review, not always necessary in signing a trade deal.

China.Russia deal

What was hard to miss as the Chinese and Russian leaders reviewed the troops (picture from the Washington Post)  was the fact that the previous time this week that China had been front page news had come only a few days earlier when the US Attorney General, for the first time, threw down the gauntlet on Chinese industrial spying by indicting 5 hackers who were demonstrably focused on stealing US trade secrets. (Picture from the New York Times) The indictment went to some length to distinguish the crimes of the Chinese Army from the practices of the National Security Agency.  And perhaps the media coverage of the indictments were in fact exploring one of the most newsworthy aspects of the matter.

Screen Shot 2014-05-22 at 1.18.08 PM

Were the two connected?  Even if they went unnoticed in the minds of the Chinese leadership, its difficult to miss the point that it was the mini-war along the Chinese Russian Border in 1970 that led Ntixon and Kissinger to the sequence of events that resulted in Nixon’s “China Card”.

The world today is obviously far more complicated.  But another question raised by the indictments of the Chinese hackers was whether there might be a need for some rethinking of the global supply chains that have grown in the aftermath of the Internet.  Today its customary for retailers in the heartland of the US to receive just in time delivery of their inventory by means of FedEx, UPS and other shipments to the US.  The connections are intimate.  They come from the massive shift of US productive capacity to China and other Asian locations.

The economics of off shoring obviously did not include a calculation of the risk of disruption.  There has been a 25 year bargain based on assumptions involving peace and prosperity. The events of the week may offer some new perspectives on those underlying assumptions.

 

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“Data Don’t Give Up Their Secrets Easily. They Must Be Tortured to Confess.”

May 1st

This Harvard Business Review blog post from Thomas C. Redman, the author of Data Driven (2008) makes the interesting point that the emerging age of data will demand organizational change. He describes his experience with Bell Labs to get at a challenge that’s captured in the lead quote.

To create a systematic discovery process will require that future leaders organize appropriately (Redman describes this as creating a laboratory). Learning to manage the lab and to manage the people will be the challenge of making this work. Yet even though the practice is now unfolding, Redman has succeeded in highlighting the key challenge of the new era.

As we discover data resources that were never practical or even reachable in the past, the next question will be how to make use of the new resources – in short, where will the thinking take place?

Crisis Response and Transformation Initiatives

November 17th

At the National Academy of Public Administration’s Annual meeting the subject turned to the implications that the Leader’s Guide held for management in a crisis.  The moderator, Tom Timons of Federal Drive Time Radio, first asked what do we mean by a crisis? We were focused on planning for leadership in a crisis.  But what does that mean?

For me, a crisis in government is now an extremely broad and far reaching concern.  While the concept might have once been limited to natural security crises or the emergencies that are the mission of FEMA.  But today this has been considerably broadened as crises in our lifetime and recent memories range from the Arab Oil Embargo to the financial crisis and from Japan’s Tsunami to Katrina to the BP oil spill.

Crisis in government that generally does not respond with agility is any event where a critical parameter changes by a factor of 10.  The events that occur in the life of any company or government agency that Andy Grove of Intel called Strategic Inflection Points are now the crisis for which we are training future leaders.

The Playbook had at least two important points of intersection where leadership issues and the definition crisis becomes a critical leadership issue:  first, in the case where launching a large scale change program would clearly be suboptimal and second, where being in a crisis mode inevitably leads to a process that will repress innovation.

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Then and Now

March 10th

In the late 1960s a French journalist named Jean-Jacques Servan-Schreiber
wrote The American Challenge, one of the most popular books ever published in
France, about the silent economic competition between Europe and the US. The
popularity of the book was partially based on its strategy for European
Unification to match Americaʼs emerging power. As de Gaulle resigned in 1969, Servan-Schreiber offered a contrasting view for a resurgent, unified Europe.

Even more importantly for Americans, the book offers a high water mark
documenting American economic strength. In spite of American preoccupation
with Vietnam, there were many others in the world who envied the economic
power of the US. At this moment in 2011,  it seems as though a peak had
been reached some time ago.  The American Challenge documented a high point of economic
achievement emerging from the 60s.  In light of the challenges that face the US today, when many are beginning to take stock of the economic vitality that appears to have been lost, that moment in 1970 documents an interesting point of perspective.

To contrast the world of 197o with today it’s useful to seek data that might give content to the comparison.  The 1970 Fortune 500’s top 30 companies compared with the Fortune 30 from 2010 seemed to be an appropriate comparison.  Primarily, I wanted to see whether a comparison of the top firms in the U.S. economy – then and now – would tell any stories.

Table 1 lists the top 30 firms from the Fortune 500 of 1970 and makes the
comparison with 2010.

THE TOP OF THE FORTUNE 500[1]

1970 List 1970 Sales 2010 List 2010 Sales
1. General Motors $24.3 billion 1. Wal-Mart Stores $408 billion
2. Exxon [Mobil[2]] $14.9 2. Exxon Mobil $285
3. Ford $14.8 3. Chevron $164
4. General Electric $8.4 4. General Electric $157
5. Intl. Business Machines $7.2 5. Bank of America $150
6. Chrysler $7.1 6. ConocoPhillips $140
7. Mobil $6.6 7. AT&T $123
8. Texaco $5.9 8. Ford Motor $118
9. ITT [Industries] $5.5 9. J.P. Morgan Chase $116
10. Gulf Oil $5.0 10. Hewlett-Packard $115
11. AT&T Technologies $4.9 11. Berkshire Hathaway $112
12. U.S. Steel $4.8 12. Citigroup $109
13. Chevron[Texaco] $3.8 13. Verizon Communications $108
14. LTV $3.8 14. McKesson $107
15. Dupont $3.7 15. General Motors $105
16. Shell Oil $3.5 16. American International Group $103
17. CBS $3.5 17. Cardinal Health $100
18. Amoco $3.5 18. CVS Caremark $99
19. General Telephone & Electronics $3.3 19. Wells Fargo $99
20. Goodyear Tire & Rubber $3.2 20. IBM $96
21. RCA $3.2 21. United Health Group $87
22. Esmark $3.1 22. Proctor & Gamble $80
23. McDonnell Douglas $3.0 23. Kroger $77
24. Union Carbide $2.9 24. AmerisourceBergen $72
25. Bethlehem Steel $2.8 25. Costco Wholesale $72
26. Boeing $2.8 26. Valero Energy $70
27. Eastman Kodak $2.7 27. Archer Daniels Midland $69
28. Proctor & Gamble $2.7 28. Boeing $68
29. Atlantic Richfield $2.7 29. Home Depot $66
30. Rockwell $2.7 30. Target $65

[1] With appreciation to Fortune Magazine and CNN Money.  From http://money.cnn.com/magazines/fortune/fortune500_archive/full/1970/

[2] Their convention is to show the current name of the company. I have put the changed part in brackets.

My conclusion is that there are almost too many stories to tell. Just this
comparison shows a number of the dramatic transformations of the economy in
our time.

  • The dramatic consolidation of the oil and gas industries and their continuing geopolitical problems stands out. Perhaps as we watch the run up in oil prices and recognize once again that American dependence on conventional oil has not been broken, the vulnerability of the worldʼs economy to an exceptionally fragile set of political arrangements is still clear. The missing names are particularly obvious (Texaco, Gulf, Chevron, Shell, Amoco, and Atlantic Richfield) and with revolution in Tunisia and drama unfolding in Libya and Bahrain this is not a story that is complete.
  • The automotive industry’s crisis has been a long running story over 30 years of American competitiveness but the loss of Chrysler, slippage of General Motors and Ford’s almost surprising success is still notable.
  • Part two of this story is the dramatic loss of the American industrial base.  The missing companies like US steel, LTV, Union Carbide, Bethlehem Steel, and Rockwell are interesting and itʼs apparent how much has been hollowed out of the American economy.
  • Perhaps a related part of this story is the financial crisis and the loss of thefinancial base. Bank of America and J.P. Morgan Chase, Citigroup, AIG, Wells Fargo all have substantial sales. But they acquired substantial parts of their modern portfolios when icons of finance collapsed. General Electric is fundamentally a different company today then it was 10 years ago when GE Capital was playing such an important role in its success as Jack Welch retired.

Oil, manufacturing and finance, all showing the effects of significant turmoil now
are managed with exceptional attention to managing risk. The picture of
consolidation and continuing exposure to powerful global forces can be seen in
each sector.

  • The story of the telecommunications sector, the Internet, the changes in the computer industry almost offer to many stories to create a meaningful summary. In the information sector alone the story of revolutionary change has involved changing government roles and regulations, Globalization, technology innovation and social trends that were rarely anticipated in 1970. CBS is no longer the company that it was in 1970. Verizon and AT&T barelyresemble their 1970 counterparts. Above all, this sector explains why market capitalization rather than sales is probably a better measure of todayʼs marketplace.
  • The rise of retail in the current list is astonishing. Not only is Wal-Mart sitting in the lead position but the appearance of Kroger, Home Depot, Costco, and Target is fascinating. And of course
  • Finally, there is the story of an aging population and the appearance of Cardinal Health, CVS Caremark, United Health Group Amerisource Bergen on the list.

That’s only seven stories from a small shard of data. Yet it was surprising to me
that in this shifting picture there would so much that could be seen in this
comparison of the world of 1970 and the present.

My memory of the time dwells on the disruptions of Vietnam, civil rights
struggles and Watergate, but what is striking to me now about the two lists is the way in
which the “externalities” to corporate strategies have proven over time to be the forces that defined the companies that disappeared and the evident trends that are shaping the largest
companies that remain in the marketplace today.

I am not reassured by looking at the top 30 companies of the Fortune 500 today.
They would seem to illustrate an economy of accumulated wealth sitting at the
end of a global supply chain expanding its consumption of what other people
make. How long could such a picture be sustainable on todayʼs terms?

The State of Strategy, 2011

March 4th

After reading the excellent and provocative Lords of Strategy only recently, I eagerly seized “The State of Strategy Consulting, 2011”. (A blog post by Walter Kiechel in the Harvard Business Review, March 2, 2011) I should have known that when Walter Kiechel cited the Book of Job in the first sentence of his post that the outlook was not going to be rosy.

His assessment of the state of strategy consulting was that the premier firms are going to have difficulty selling their services at premier prices and that they are already doing strategy work as a “loss leader.”

Of course, the Lords of Strategy itself would caution that it’s difficult to remove assessments of the value of management tools from their market context. Rationalizing portfolio strategies in the 1970s, grasping the transformative impact of the Internet on the five forces in the 90s…leaders have consistently found that in times of fundamental change, strategy tools have proven valuable. Bain research drew this conclusion several years ago.

So what should we make of our current context and what implications should future lords of strategy draw? A clear-eyed assessment might begin with the fact that the HBR has found it useful to facilitate a “conversation” blog and that multiple participants commented on the state of strategy consulting by referring to technology, open source concepts and agile responses.

The basic point of Walter Kiechel’s blog post (that when the premium firms pursue whale projects they are moving into a competitive space that will make premium pricing a challenge) is not contradicted by an even more important development. A challenge has been issued to the traditional concept of strategy in places like Tunis and Cairo with astonishing results.

Strategy, the “work of generals,” that Napoleon and Clausewitz adopted from the Greeks, is already being challenged in fundamental ways by technologies like Twitter and Facebook. Only a few weeks ago it would have been controversial to suggest that a democratic impulse is surging in the traditional constituencies of the firm who are demanding a seat at the table when the most sacrosanct of strategy concerns are decided. The future lords will have to adjust and anticipate the crowd that is gathering outside the door. While strategy firms are seeking new markets, the core concept of strategy is itself changing.

The Great Media Mashup

January 6th

The media critic of the New York Times, David Carr, offered his views on the future of big media on January 2nd in an article entitled The Great Media Mashup. He describes the surreal experience of watching the gradual decline of long time media institutions that have defined our society. There may have been a great deal of conversation about the transformation of the communications industries, but suddenly the speed is beginning to accelerate.

There is no news in seeing “two year old web sites are worth more than 50-year old magazines.” Nor is there news in seeing that social media have now stolen the spot light in center stage. But taken as a whole, David Carr’s list of changes shaping the media makes for compelling reading.

  • The End of the Verticals. The phenomenon that iPod owners and Apple TV owners will recognize where the distinction between TV, radio, Internet and books is less clear than it was a year ago. For Borders this is a grim reality. The world has not yet reached the point of understanding that the competitive playing field may be the screen of an iPad and in that framework the Apps look a lot alike.
  • Hybrids for the News Highway. Withdrawal of the advertising base that has supported the mainstream media (whether this is coming from marketing or from Google or Craig’s list) has eroded the business models and created a world in which the great institutions cooperate because they can’t afford to compete.
  • Televised Social Media. Carr imagines a “tent pole” in televised media that permits social annotation. Technically Apple TV could do this today, right? So the threshold of a new medium where the device makes it possible for Glenn Beck or Sarah Palin or Karl Rove or Oprah or the Center for American Progress or the Jersey Shore brings together an audience to watch and crack wise. Couldn’t American Idol do this now?
  • The Non-Linear Grid. With 21% of global shipments of televisions now a web enabled TV, the largest screen and most centrally located device can be added to iPads, mobile phones and other vehicles for connecting audiences. Carr imagines a world in which the “linear programming” of cable and broadcast television is history and appointment television is so 20th Century. Carr imagines a world in which elections and sports like professional football become critical to the future life of broadcasters.
  • Print Looks for a Payday. David Carr explains that the New York Times and others will soon invite their regular users to subscribe on line. But recognizing that it might have been a mistake to have decided to give away the content on line is coming a little late. He explained to me that online media revenue surpassed newspaper revenue for the first time in 2010.

Being invited in to think about these things I recognize that the impact of the eBook on Borders and Barnes and Noble is astonishing and the speed with which the wave has come is incredible. Watching the anchor store to Bethesda Avenue shift from Barnes and Noble to the Apple store is more than a little surprising.

The speed of the growth of ebooks may be astonishing but the fact that Netflix accounts for 20% of peak Internet traffic and threatens the Infrastructure of the Internet is equally surprising. Welcome to the world of the non-linear grid.

The High Water Mark, Again

January 5th

On her morning CNBC show Suvannah Guthrie reported that a California court has now revisited the questions of privacy and personal communications. In the reported California case the judge took a radically different approach from the Ohio case that was decided in December. In California the court decided that the police did have the right to information on the cell phone of an arrested man.

Perhaps the Ohio case was too convoluted in the first place (the plaintiff had the expectation of privacy but the evidence that had been illegally attained was not needed for conviction.) But now there are two cases that would seem to disagree with one another. There will no doubt be a Supreme Court case someday soon that will explore the question of the individual’s right to privacy for emails and other electronic communications and it will be a highly charged one.

The idea that electronic communications would be less private than written ones or even phone calls is a huge precedent. A letter is protected by a whole apparatus of postal rules, regulations and inspectors. A court order is needed to open the mail. Yet in the electronic world, in California at least, if someone were arrested (suspicion of some crime such as illegal substances or DUI) and if their phone were taken from them, the information pathway that would be opened (email, phone calls, applications) could be enormous.

The comparison with the Postal Service is a sharp one. I remember at a dinner in 2000 hearing Scott McNealy, the Chairman of Sun Microsystems, make fun of a “letter” as a secure transmission. After all a letter is made of flimsy paper and sealed with spit and handed to a government employee, he noted. The capacity of electronic communications to provide a secure channel far exceeded anything that the Post Office could do, he argued. Certainly he is right.

But what if, in spite of the technological capacity of the medium to protect a communication, the law chooses not to do so?

The high water mark of Internet Communications lasted 2 weeks.

Facebook and What its Worth

January 3rd

There has been a tremendous amount of interest in one financial event that opened the first Monday of the new year. Goldman Sachs and a Russian investor, Digital Sky, invested $500 million in Facebook. This is interesting on so many levels that it’s hard to pick the most important implication.

  • There is the question that the market led with – is this $50 billion valuation justified?
  • There is the question of “secondary markets” and whether the $1.5 billion that Goldman states that it is going to raise next is anything other than the thing that the SEC says is the focus of its “inquiry.”
  • There is Goldman’s reasoning in taking on this particular issue at this time.

All of this is interesting. But the comment to which I keep returning was the one from Erin Burnett on CNBC’s Morning Joe. Erin pointed out that if Facebook is valued at $50 billion then its being valued at more than Boeing.

This comment led to a discussion with Joe Scarborough about companies that “make things” and companies, like Facebook, that make “nothing.”

The part of this that I find so interesting is the question of valuation in the digital age. I can imagine a number of reasons that Goldman might have granted Facebook a valuation of astonishing magnitude. At least half of the reasons would make you nervous that the regulators or the culture could keep up with the new “bubble.” But putting these issues aside, the even more interesting question to me is to imagine the value of Web 2.0. Where is Facebook going and what will be possible for companies like this? Sitting in front of a computer screen as we all do every day, the possibilities for the future of an institution that can make connections among people who have not (literally) seen one another for 40 years is astonishing.

The future is more about watching the “crowd” find its voice.

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Another HIgh Water Mark in the Internet Age

December 14th

In an important finding in the Court of Appeals in the Sixth Circuit today (December 14, 2010) the court found in favor of the government and against a man named Steven Warshak, his wife and his company. Warshak had argued that when the government had served a subpoena on his Internet Service Provider, NuVox, and obtained 27,000 emails that he had used to run his company (selling an herbal supplement that promised to enhance mail potency) that his constitutional rights had been violated.

The court found

“We find that the government did violate Warshak’s Fourth Amendment rights by compelling his Internet Service Provider (“ISP”) to turn over the contents of his emails. However, we agree that agents relied on the SCA in good faith, and therefore hold that reversal is unwarranted (Opinion page 14 and following)”

The government served a subpoena on the ISP to seize the emails in January of 2005 and Mr. Warshak did not find out about the seizure until the following year. He was found guilty of mail and wire fraud and sentenced to 25 years in jail. So in the Appeals Court he has argued strenuously that his Fourth Amendment Rights were violated. And the government responded that even if its search of the emails was unconstitutional, its agents relied upon the Stored Communications Act (SCA) (18 USC 2701) which says that the government can obtain stored communications and did so in good faith.

There is a great deal of complexity in the case and the history of whether the government properly complied with the SCA or not is gripping. Ultimately the Court says in effect “Mr. Warshaks rights were violated, but it doesn’t matter, he is guilty anyway.”

What is important about the case is the Court’s finding that substantially broadens the protections of the Fourth Amendment in an Electronic Age.

“The Fourth Amendment provides that “[t]he right of the people to be secure in
their persons, houses, papers, and effects, against unreasonable searches and seizures,
shall not be violated, and no Warrants shall issue, but upon probable cause . . . .” U.S.
CONST. amend. IV. The fundamental purpose of the Fourth Amendment “is to safeguard
the privacy and security of individuals against arbitrary invasions by government
officials.”

The court found first that Mr. Warshak had the expectation of privacy and second that it was reasonable for society to recognize that expectation and to find in this case that the government’s actions were significant enough to have breached a constitutional protection. The court argued that in the case of a bank, no, and in the case of a phone company, yes. Here the key sentence becomes

“The Fourth Amendment must keep pace with the inexorable march of technological progress, or its guarantees will wither and perish.”

The court first reviews the 1877 protection of letter mail

“Letters and other sealed packages are in the general class of effects in which the public at large has a legitimate expectation of privacy[.]”); Ex Parte Jackson, 96 U.S. 727, 733 (1877). While a letter is in the mail, the police may not intercept it and examine its contents unless they first obtain a warrant based on probable cause. Ibid. This is true despite the fact that sealed letters are handed over to perhaps dozens of mail carriers, any one of whom could tear open the thin paper envelopes that separate the private words from the world outside. Put another way, trusting a letter to an intermediary does not necessarily defeat a reasonable expectation that the letter will remain private. See Katz, 389 U.S. at 351 (“[W]hat [a person] seeks to preserve as private, even in an area accessible to the public, may be constitutionally protected.”).

“Given the fundamental similarities between email and traditional forms of
communication, it would defy common sense to afford emails lesser Fourth Amendment
protection.”

And there it is. This is a ruling that might have been expected at some point in the past 15 years since Netscape went public and the Internet took off. At some point there would be a finding that emails and letters should be seen on equal terms.

In an age of Wikileaks, however, does this doctrine of finding that an Internet Service Provider is the equivalent of the Post Office not have far reaching implications?

“If we accept that an email is analogous to a letter or a phone call, it is manifest
that agents of the government cannot compel a commercial ISP to turn over the contents of an email without triggering the Fourth Amendment.
An ISP is the intermediary that makes email communication possible. Emails must pass through an ISP’s servers to reach their intended recipient. Thus, the ISP is the functional equivalent of a post office or a telephone company. As we have discussed above, the police may not storm the post
office and intercept a letter, and they are likewise forbidden from using the phone system
to make a clandestine recording of a telephone call—unless they get a warrant, that is.
See Jacobsen, 466 U.S. at 114; Katz, 389 U.S. at 353. It only stands to reason that, if
government agents compel an ISP to surrender the contents of a subscriber’s emails,
those agents have thereby conducted a Fourth Amendment search, which necessitates
compliance with the warrant requirement absent some exception.”

In the end the court found that citizens should have an constitutionally protected expectation of privacy even if it’s not reasonable to imagine that such privacy could be insured.

“Therefore, because they did not obtain a warrant, the government agents violated
the Fourth Amendment when they obtained the contents of Warshak’s emails.
Moreover, to the extent that the SCA purports to permit the government to obtain such
emails warrantlessly, the SCA is unconstitutional.”

Perhaps Mr. Warshak will appeal. Perhaps the Supreme Court will hear the case. But there is little question that as the tide comes in and further defines the electronic age, another high water mark has been reached.

The Vision Thing

October 20th

Leading Change

Harvard Business School Professor John Kotter wrote about the principles of leading change in 1996. In this modest book, Kotter outlines eight problems that inhibit change. “By any measure the amount of significant, often traumatic change in organizations has grown tremendously in recent year ,” he begins. Kotter studied dozens of change programs and defined eight problems that he uses as the basis for identifying eight principles that underlie successful transformations:

Getting Started

➢ Establishing A Sense Of Urgency – The Question Is Not Just Whether Action Should Be Taken But What Action Must Be Taken Now.
➢ Creating A Guiding Coalition – Perhaps The Single Most Powerful Lesson Of The New Media Has Been The Demonstration That Coalitions Must Be Broader.

Setting Direction

➢ Developing A Vision And Strategy – Kotter’s Special Gift Is To Take These Concepts And To Reduce Them To Simple Compelling Ideas.
➢ Communicating The Change Vision
➢ Empowering Employees For Broad Based Action – Ultimately This Is The Test Of The Belief In The Urgency Of The Problem and The Quality Of The Vision

Implementing Change

➢ Generating Shorter Term Wins – Tapping The Generating Power Of Success.
➢ Consolidating Gains And Producing More Change.
➢ Anchoring New Approaches In The Culture

In his powerful book, Kotter offers an elegant solution to a vexing challenge. Particularly in the public sector environment where there are multiple variables and defining causality is often problematic, Kotter contrasts the authoritarian command and control style with the micromanagement style and then offers a simple concept for what a vision must achieve: offering a sense of urgency, a concrete, timely sense of direction and a value proposition.

“It’s going to rain in a few minutes. Why don’t we go over there and sit under that huge apple tree. We’ll stay dry and we can have fresh apples for lunch.”

It’s when leaders will not, or cannot offer a statement that conveys direction the there will be no framework within which to define effective strategy.

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