Irving Wladawsky-Berger

Some Thoughts on Global Companies in the 21st Century

Given my long association with IBM, the close relationships I have enjoyed with a number of our clients, and my recent involvement with Citigroup, it is not surprising that I am very interested in exploring what it takes for an organization to thrive in our increasingly global and highly diverse world.  Perhaps my personal multi-cultural background is also part of the reason I am so attracted to the subject.

Managing a large, global organization is indeed very difficult, especially in our unpredictable, emergent, fast changing and intensely competitive market environment.  While some might thus conclude that the answer is for a company to resist doing business around the world, the reality is that managing a business, any business, is a very tough job fraught with perils, as evidenced by the high mortality rates of companies from start-ups to those in the Fortune 500.

Are there any basic principles that might serve as guidelines in the management of globally integrated companies?  Based on my personal experiences, I think there are a few, that if carefully applied might prove useful.  Let me share my thoughts on the subject.

First, there is a huge difference between back-office tasks, which form the basic infrastructure of the business, and front-office activities, which are the company's interfaces to their clients and markets.  Very different management disciplines should apply to each.

In general, the most important principle for managing the infrastructure of the enterprise is constant simplification, through consolidation, standards and integration.  This applies as much to a company's IT infrastructure as it does to its information and business process infrastructure.

After a few years, every company will have built up a legacy infrastructure.  Such legacies come to be in a variety of ways, - through the normal growth of the original company, through the creation of new divisions and departments, and through mergers and acquisitions.  One would expect that as the company's infrastructures grows, economies of scale being to apply, with higher volume processes resulting in lower costs, and larger amount of information leading to considerable new insights and market intelligence.

But in fact, this is often not the case.  If not carefully managed, the complexities and costs of a legacy infrastructure will likely become a serious obstacle to the continuing evolution of the business.  Instead of being a competitive advantage and providing economies of scale, it will hinder the business from effectively competing with faster moving, often younger companies, which are able to get new offerings to market significantly faster and at lower costs.

Why does this happen?  The answer, in a nutshell, is a lack of management discipline.  Departments are allowed to purchase and operate their own IT equipment, which they then often run at low utilizations, incurring high system management and energy costs.  Different divisions around the world are allowed to have their own separate processes for essentially the same functions.  Information becomes very difficult to integrate due to a lack of standards.  Merged companies are allowed to continue to operate as separate entities. 

In my experience, every group will try to argue that it is unique, and that the consolidations that top management is trying to impose across the company should not apply to them.  I guess it is just a matter of human nature to want to run your own show and be independent from, - what appears to you as - faraway, arbitrary decisions. 

But with few exceptions, allowing such differences and independence when it comes to back office infrastructure makes no sense at all.  By definition - the back office is all internal to the company and invisible to its customers, who could care less how the company operates as long as they get excellent, highly personalized, competitively priced products and services.  Companies that allow their IT, information and process infrastructures to grow every which way will pay a very dear price for their lack of management discipline.

But while the back office assets of a company - its technology, machines, information and processes should be managed for maximum simplicity and efficiency, its front office tasks - those dealing with clients and markets - should be managed to achieve the maximum personalization and differentiation at the most reasonable costs.  Products and services might be commodities, but you never, ever want your customers to feel like they too are just commodities to the company.  A successful business will make each of its clients – institutions as well as individuals - feel special by understanding and addressing their unique requirements. 

How do you do this?  How can a global company provide such a high quality of experience to both individuals and institutions around the world at affordable costs?  To do this well, you need a top notch back-office infrastructure.  You need the ability to integrate and analyze lots of information, so you can gain insights into the various markets in which the company conducts business, as well as to understand how to best serve each client in each of those markets.  You need a common set of well managed processes to be able to provide services to clients around the world in as productive a way as possible.  You need to embrace industry standards to facilitate access to information and applications across the enterprise and beyond.  And you need a highly reliable, scalable, efficient, open IT infrastructure to support all the information, processes and applications.

This is all very, very difficult.  Which is why, above all, you need highly talented people in the organization.  I wonder if access to the diverse talent and innovative ideas now available around the world might be the biggest potential advantage of truly global companies over their more local or regional competitors.  Given my strong belief that innovation in the knowledge economy is all about connecting dots out there in the real world, the more wide-spread and diverse the dots, the bigger the opportunities for breakthrough innovations.

Finally, it all comes down to not only strong management, but top leadership.  To be successful in our complex, unpredictable markets, a company needs the kind of leadership that recognizes, attracts and retains the best possible talent from all over the world, and creates a culture of innovation that encourages them to address and solve these highly exciting but seemingly impossible challenges we face in the 21st century.

Nurturing a Healthy Innovation Environment

I strongly believe that top talent is the most important asset for any business that aspires to a leadership position in the knowledge economy.  Talent enables a company to better cope with, adjust to and thrive in our fast changing, unpredictable world.

But while the presence of top talent is a necessary condition for leadership, it is not sufficient.  You need to put that talent to work, not only contributing to the operational excellence of the business, but focusing on innovation, so the company can survive the onslaught of new competitors and retain its leadership position into the future, as well as be able to evolve and become a leader in important new areas

Fostering a spirit of innovation among talented people is very difficult.  Why is that?  Lots of excellent management books have been written on the subject, but I would like to offer a more personal explanation.

The main reason innovation is so difficult to foster in a business, I believe, is the fear of rejection that people have to overcome when they are championing a new idea.  This is particularly true when it comes to disruptive innovation - which by its very definition is going against the grain of what the business is currently doing.

Lots of books and films have focused on individuals that surmounted the odds and valiantly succeeded in realizing their innovative dreams, overcoming initial ridicule and rejection by the powers-that-be around them.  While the ending of these movies is typically very uplifting – glory and honors, perhaps even love and riches, - the first hour of the film is all about dealing with and overcoming rejection.

Rejection is painful.  Few make it through that barrier - which is why we publicly celebrate those that do.  Without a doubt, one of the most important qualities successful innovators must be blessed with is a very tough skin.

Just about all the cards in a company are stacked against the nurturing of innovation - and innovators.  The managers in the business are consumed with operations - improving products and services to keep up with competitors and new technologies; supporting existing customers and acquiring new ones; making sure that employees, business partners and other constituencies are as happy as possible, or at least not so unhappy that they will cause problems they then have to deal with.  Last, but far from least, are the all important business results, which a public company must achieve in order to satisfy a fickle, fierce, short-term oriented financial community - quarter after quarter after quarter. 

On top of that, these beleaguered managers are doing their best to avoid burnout and have some kind of personal life - partners, children, friends, family, maybe even some fun now and then - what we have been wistfully calling work-life balance.

If you work for one of these harassed managers, and come to them with a wonderful new disruptive idea that will radically change everything around them - don't be surprised if you get less than a stellar reception.  The better managers will politely listen to you, provide some encouragement and give you good advice on how you might be able to further pursue your ideas.   But they will honestly tell you that they barely have the time and budget to personally help beyond a pat on the back now and then.  The not-so-good managers, will roll their eyes and essentially telegraph that you should go back to work and stop wasting their precious time with your far flung ideas.

I think that this reflects, - more or less, - the environment in most companies, an environment that is only going get more intense given the rapidly changing, global, competitive world in which we live.  How then can you nurture innovation in the company in spite of all the forces stacked against it?

Let me offer a couple of suggestions, that I believe are absolutely necessary to create the proper environment for innovation to thrive, based on my personal experiences through my long career at IBM, as well as my involvement with other companies.

Innovation is very much a collaborative endeavor, - a team sport.  When people come up with a new idea, they very much need to bounce it off other people.  New ideas are almost always rough and ill formed at first, so they require a constant back-and-forth dialog in order to properly shape them into something a bit more understandable and actionable. 

Where are those people that you should be bouncing ideas off at these early stages?  As discussed above, don't expect much from you line management at this point.  The bulk of the support needs to come from colleagues within and outside the company, especially those who are themselves thinking about new ideas.

I strongly believe that isolating people in organizational silos is one of the biggest obstacles to innovation.  Companies that are serious about innovation must do everything possible to encourage horizontal communications and collaborations across the organization.  They must help their people self-organize into communities of interest that cut across the hierarchy.  They must help them meet each other by providing the right opportunities for them to physically come together from time to time, as well as the right tools and platforms so they can continue their collaborations once they are back in their separate locations and day-jobs. 

Regardless of how talent-rich a company is, the outside world is obviously many time richer.  Consequently, companies that want to foster innovation need to also encourage their people to participate in professional organizations and attend external meetings every so often to make sure that they know what is going on out there and get to meet people who share their interests across academia, the business community and the public sector.

But, what do you do if your manager not only does not provide encouragement for your new ideas, but actively discourages your moonlighting efforts to pursue your new ideas by working with others across the company and beyond – even on your own time.  After all, fleshing out disruptive innovations takes time and energy that your manager may feel are better spent on your current responsibilities, regardless of how good a job you are already doing.

A spirit of collaboration and innovation does not come naturally to an organization unless top management actively supports and promotes it.  For innovation to be successful, it must become an integral part of the culture of the company, and it is impossible to impact culture without the strong, personal support of the CEO and other top executives.  They must really believe it and back up their beliefs with concrete actions, not just give empty speeches about innovation that by themselves lack credibility. 

Organizational culture is formed through a series of subtle signals that let everyone know what the company really values.  For example, how do top executives react to middle managers that hoard their top people and actively discourage them from cooperating across the organization?  Do they encourage their top performers to become prominent in professional organizations and attend conferences?  Does the CEO personally meet from time to time with employees in the trenches who are actively working on innovative new ideas?  What kinds of people get promoted and rise up in the organization?

My advice to any company that wants to truly foster innovation is to let everyone know that while the company must excel at operations, it must also excel at innovation.  It must communicate that the business must clearly achieve strong financial results, but in addition, it must be a leader in uncovering new technologies, new market opportunities and new business models.  And, ingrained in the culture must be the knowledge that the highest achievers, - whether on a technical or management track, - have to be good at both – operational excellence and strategic innovation.  This is not easy at all, but it is what a company must do if it truly wants to create a healthy environment for innovation to flourish.

Web 3.0: Materializing the Conceptual Worlds of the Mind

Last week I was in London, where I participated in a very unique lecture sponsored by Design London.  Design London is an initiative announced last year to combine the creativity and expertise in design from the Royal College of Art, engineering from Imperial College's Faculty of Engineering, and the business of innovation from Imperial College's Tanaka Business School.  It was established to stir together the scientific, engineering, business and creative design communities to enhance business and public sector innovation.
 
The lecture - Web 3.0: Materializing the conceptual worlds of the mind - is part of Design London's STIR lecture series.  The STIR - Simulator, Teach, Incubate, Research - lectures aim to address a wide range of subjects from widely different personal experiences and points of view.  Many times throughout my career have I participate in joint lectures and panels, but never before have I done so with a film director – John Maybury, -  and an architect and designer – Nigel Coates.  That was a most gratifying and stimulating first for me.

John Maybury is a British film director with quite a number of full length features and music videos to his credit.  In his talk, he showed clips from some of his films and music videos, and explained how he mixes together live actors and computer generated images (CGI) to convey the desired feelings to the audience and advance the story.  Film directors now have an increasing variety of tools to reach out to the audience and bring their stories to life.

Nigel Coates is professor and head of the Department of Architecture at the Royal College of Art.   He does not just architect a single space or a single building.  He is interested in a holistic, eclectic approach to the design of cities, that draws both from the world of films and the world of systems.  He sees the city as a total organism, in which the architecture of the buildings, roads, parks and other parts of the city, and the architecture of the lives of its inhabitants and visitors interact with and shape each other.

In his writings, Nigel argues for "a re-imagining of the city as a dynamic hybrid: a palimpsest of not just old and new, but of the real and the hypothetical."  His works have been exhibited in the Venice Architecture Biennale, where they will once be shown later this year, as well as the Tate Modern and other major museums around the world.

In his talk, Nigel said that he views architecture as a framework in which events happen.  Thus, to just emphasize the physical aspects of architecture would be too static a view and miss the whole point.  To understand a city, requires an engagement with the urban psyche.  He thus advices people to be the architects of their own lives, and in doing so to radically adapt the buildings around them.

He showed us examples of some of his hybrid, holistic cities.  Ecstacity is a fictional global city pieced together from sections of Cairo, London, Mumbai, New York, Rio de Janeiro, Rome and Tokyo.  It is a global, multi-ethnic, multi-cultural, all embracing city, where its various parts are conjoined and intertwined.  In Nigel's own words "half-real and half-imaginary, Ecstacity builds on the increasingly global outlook of existing cities . . . it partners a fluid architecture of hybrids with the information world we already inhabit . . . it invests the everyday with conflations of scale, of story, of emotion, replacing institutional power with shared grounds of identity and desire".

Mixtacity was commissioned as part of a 2007 exhibition on Global Cities at the Tate Modern museum.  Mixtacity is a design for the Thames Gateway, an area of land stretching 40 miles east of London on both sides of the river Thames.  In it, Nigel explores the area's potential to accommodate the complex range of cultures, ethnic ties and lifestyle choices of its future inhabitants.  But he does so not with classic architectural drawings, but driven by an artistic spirit, in which is models are made of biscuits, sugar lumps, cotton, tacky souvenirs, toy guns and giant human hands, in order to better convey his vision of what the Thames Gateway should be like.

I truly felt like the odd man out - the boring technologist and businessman amidst two world renowned artists and creative spirits.  But, that was the whole point of this eclectic Design London lecture.  Why should engineering and business continue to feel trapped by the conventions of the past?  Why shouldn't technology liberate our engineering and business designs, just like artists like John Maybury and Nigel Coates feel free to create new kinds of films and cities?  This is the essential promise of virtual worlds to the world of IT applications, the subject of my talk.

I was very taken with Nigel's crisp definition of architecture as a framework in which events happen.  I wrote it down as soon as he said it, because I felt that this is what IT architectures need to evolve to as well.  Today, most IT architectures are totally based on the capabilities of their underlying technologies.  They are designed and built "bottoms up", and in that sense, generally incomprehensible to the people trying to use them.

Most IT applications feel like dysfunctional films and cities, where it is not clear at all what is happening  and what is possible, and where bizarre error messages keep popping up asking us questions whose meaning we could not possibly fathom.  The reason is probably the lack of a narrative or coherent whole.  There is essentially no designer, in the sense of someone that tries to put himself in the mind of the user of the applications, and attempts to make the applications as simple,  intuitive, and human as possible.

But, because of the tremendous power of information technologies, we are now in the position to begin to change this old-fashioned approach to business and engineering.  The design of applications should start by asking ourselves how we envision such applications in our minds, and even more important, how the intended users of the applications should envision them, so that their experience is as satisfying as possible.

This is a gigantic cultural shift for engineers and business executives, perhaps more radical than anything John Maybury and Nigel Coates have created in their long and successful careers.  It says that to design a healthcare system, a financial institution or a retail establishment, we now need to start by conceptualizing not just the capabilities of the hospital, bank or store, but also the experience that we want their clients, employees and everyone else to have when dealing with them.
 
It also represents a major shift in IT, from a focus on the computer, to a focus on the human experience.  Information technologies can now simulate just about anything, so they may as well present themselves to their users in the way that best matches their concept of the problem at hand, and of the application that is intended to help them resolve it.

This is truly revolutionary.  I cannot think of a more empowering and liberating view of the potential of technology in the decades ahead.

Reflections on Cloud Computing

Over the last year, I have become intrigued by the rise of cloud computing.  An increasing number of articles are being written on the subject, as a quick online search of the term will attest.  More and more companies are taking a serious look at cloud computing.

Last summer, IBM launched a study of cloud computing sponsored by the IBM Academy of Technology and led by our top experts in the area.  The study was very positive about the opportunities of cloud computing for the IT industry.  But it also highlighted the many challenges to be addressed in deploying cloud computing, especially in existing data centers.

So, what exactly are we talking about?

A recent report by Forrester Research said in its executive summary that: "Cloud computing is a new IT outsourcing model that doesn't yet meet the criteria of enterprise IT and isn't supported by most of the key corporate vendors.  It's wildly popular with startups, exactly fits the way small businesses like to buy things, and has the potential to completely upend IT as we know it.  And there's a high likelihood developers inside your company are experimenting with it right now.  Forrester spoke with more than 30 companies in this market to determine its worthiness for enterprise consideration and found that it provides a very low-cost, no-commitment way for enterprises to quickly get new services and capabilities to market that entirely circumvents the IT department.  Infrastructure and operations professionals can try to ignore it as it is just in its infancy, but doing so may be a mistake as cloud computing is looking like a classic disruptive technology."

The Forrester report further said:  “Cloud computing looks very much like the instantiation of many vendors' visions of the data center of the future; it's an abstracted, fabric-based infrastructure that enables dynamic movement, growth, and protection of services that is billed like a utility. It also has all the earmarks of a disruptive innovation: It is enterprise technology packaged to best fit the needs of small businesses and start-ups--not the enterprise." 

BusinessWeek said something similar, albeit in more layman's terms: "A move towards clouds signals a fundamental shift in how we handle information.  At the most basic level, it's the computing equivalent of the evolution in electricity a century ago, when farms and businesses shut down their own generators and bought power instead from efficient industrial utilities."

In the past month, I have given a couple of talks on cloud computing, and as always, presentations force you to think very hard about your views on a subject, as well as how best to communicate your ideas.  I think of clouds basically as Internet-based networks made up of a very large number of servers and storage components.  They contain vast amounts of information, and provide a variety of services to large numbers of people - to their mobile devices as well as their PCs.  The users of clouds only care about the services and information they have access to, not about the underlying details of how the cloud works.

So far, this all sounds like a number of concepts we have been talking about for at least half a dozen years: Grid computing, virtualization and IT-as-a-service, let alone the Internet and the World Wide Web.  Fundamentally, we are talking about the evolution of IT and the data center in the 21st century.

But, in my opinion, two key factors take cloud computing into a qualitatively different dimension.  One is massive scalability.  I believe that the kinds of advances that we have become used to in the world of high-end supercomputing are now coming to the more general purpose computing world.  I expect that a number of the new applications that data centers will be asked to support will grow by two to three orders of magnitude over the next decade.  A 10X - 100X growth over 10 years means roughly that the applications are growing at between 25% and 60% CGR.

Then there is the much higher quality of experience that cloud applications provide to their users.  Cloud applications are very different from classic IT applications, whose intrinsic complexities are barely hidden from their users.  You truly want users of cloud applications to just be able to access them in the most natural and simplest way possible.  Cloud applications should be able to provide a really high quality of experience to massive numbers of users without missing a beat.  They should significantly improve the way people deal with the many tasks and devices that surround them in their everyday life – at work, at home, on-the-go, and wherever they happen to be.

Do we have any such workloads in the horizon that will likely grow at prodigious rates and require a human-like quality of experience?  Quite a few, I believe:  real-time information access and analysis, such as RFID-based supply chains, transportation management and security systems; myriads of new consumer applications - in entertainment, healthcare, payments and financial services; social networks and virtual worlds involving large numbers of people interacting with each other; support of billions and billions of new mobile devices and sensors; and so on.

Are such massively scalable, high-quality-of-experience workloads important only to companies like Google, Yahoo, Amazon, MSN, IBM and similar companies already developing cloud computing infrastructures?  Not at all, any more than the Web proved important only to its early adopters.  As with the Web in the mid-‘90s, every enterprise will have to develop its own cloud-like capabilities, or work closely with partners that do.

Will companies follow the pattern of electricity’s evolution a century ago and shut down their data centers, relying on highly efficient, professionally managed service providers instead?  I expect that many small businesses will do just that, as well as perhaps a number of mid-size companies.  But I suspect that many larger companies will not only continue running their own data centers, but find new growth opportunities by selling business services to the wider marketplace that were developed and only available for use within the company, as is already the case with Fidelity, UPS, IBM and a number of other companies.

How well prepared are most enterprise data centers for a 10X - 100X scalability?  By their own admission, most are not ready at all.  In fact, many CIOs think of their data centers as something like a dog's breakfast of technologies that have evolved over the years with little architectural discipline or company-wide governance.

Many data centers have grown through mergers and acquisitions with a variety of companies, each having brought with them their own separate equipment, architectures and processes.  Different departments in the business have often insisted on getting their own servers for their own applications, rather than using the global, shared data center facilities.  Small and mid-size servers have proliferated in many companies, each dedicated only to its particular applications, and thus often running at utilizations of 20% or less - that is, those servers are only doing real work 20% or less of the time, while they consume electricity 100% of the time.  The costs of managing such highly distributed installations are typically very high.

As we learned in manufacturing over the last thirty years, you cannot achieve world-class productivity and quality unless you leverage engineering disciplines and real-time information and considerably simplify your processes and architectures.  Similarly, you just cannot scale a messy data center, especially given the fast growing workloads that they will be required to support over the next decade.  System management and energy costs will prove prohibitive.  Quality, security and availability will suffer. 

Integrating the capabilities of cloud computing into enterprise data centers will require a much more disciplined approach to architecture and governance.  Just about every CIO I have ever met advocates such an approach.  But because IT cuts across just about all lines of businesses and processes of the organization, they need the strong support of the CEO and top management.  Otherwise the enterprise will just follow human nature and prioritize short-term expediency over longer-term discipline.  Given the fierce, global, competitive environment we live in, that can prove to be a very costly mistake.

Lou Gerstner at MIT

Leadership was the overriding objective of the graduate seminar I taught at MIT last Fall, - Technology-based Business Transformation, - which I will be teaching again in the Fall of 2008.  I told the students at our first meeting that I hoped the course would help them develop or enhance their leadership skills, so they can better deal with the complex systems, complex markets and complex organizations they will likely encounter throughout their careers.

In the course, we used Lou Gerstner's book "Who Says Elephants Can't Dance", which all students read and we discussed extensively in class.  Given my professional relationship with Lou, with whom I worked closely in his nine years at IBM, I invited him to come lecture to the class. He accepted, but due to health problems we had to postpone his visit. 

Lou’s visit to MIT took place on March 12.  While my class was not in session this semester, we scheduled a breakfast meeting with all students in Systems and Design Management (SDM), the program that most of my students belong to, a public lecture as part of the Dean's Innovative Leader Series at the Sloan School of Management, and a few smaller meetings.   

SDM is an interdisciplinary program between the School of Engineering and the Sloan School of Management, whose graduates receive a master of science in engineering and management.  To kick off our discussion, I read a paragraph from Lou's book, which I had used in the section on organizational culture in the class:

"I came to see, in my time at IBM, that culture isn’t just one aspect of the game – it is the game.  In the end, an organization is nothing more than the collective capacity of its people to create value.  Vision, strategy, marketing, financial management – can set you on the right path and can carry you for a while.  But no enterprise – whether in business, government, education, health care, or any area of human endeavor - will succeed over the long haul if those elements aren't part of its DNA."

Lou asked the students to reflect on how many companies had not been able to turn themselves around when a new technology disrupted their business model, not because they did not know what to do, but because the culture of the institution did not embrace the change.  He reminded us that while most companies say that their culture is about the pursuit of lofty goals like outstanding customer service, teamwork, excellence,  and shareholder value, most of the really important rules of culture are not written down anywhere.  Successful institutions almost always develop strong cultures that reinforce those elements that make the institution great.  But, when the environment shifts, it is very hard and painful for the culture to change.  The culture then becomes the key impediment to the institution's ability to adapt.

He told the story that early in his IBM tenure he made the decision that IBM was more valuable as an integrated company that could help solve complex problems and build solutions for clients.  He then realized that he needed to make sure that people in IBM worked well together as a team.  You could not integrate the company in front of the customer if it was not integrated internally.

But IBM was famous for its internal contention system, where units generally did not cooperate with each other.  He realized that to change the culture, he had to change the compensation incentives that had given rise to that culture.  Previously, IBM executives had been paid mostly on their own unit's performance, and thus had little financial incentive to work together across divisions.  Without changing the compensation system, difficult as that was, he could not address the impediments to effective teamwork.

So now, his director reports, the general managers who led the various divisions, would be paid 90% on IBM's overall performance and 10% on their unit's performance.  One or two levels down in the organization, the pay would now be based 60% on IBM's results and 40% on those of the unit.  When people saw the change, they realized that the new CEO meant it when he said that teamwork and cooperation were absolutely necessary across the whole company.

Later in the day, Lou gave his public lecture - Leadership is a Lifetime Journey - to an overflow audience.  He said that in his opinion, the concepts of line and staff management were outmoded.   A good organization needs good business line managers - responsible for the revenue and profits of their units, as well as good process managers.  The job of the process manager is to make sure that the individual processes of the organization - finance, HR, customer service, fulfillment, manufacturing, supply chain, IT and so on, were as efficient and high quality as possible.

Many companies do not pay serious attention to process management, and in fact allow different unit to each design and run their own processes.  The results are almost always bad.  Not only do the costs go up, because of redundant efforts across the company that could have been done globally for everyone, but different implementations of the same process make it difficult to integrate the company and share information and talent.  Moreover, when key processes are part of individual units, it will be harder to attract top talent, pay them accordingly, and give them the necessary scope of responsibility needed to achieve world class processes.

Lou focused most of his remarks on leadership.  The key quality you need for good leadership is passion - the urgency to attack and solve the complex problems that all organizations face.  You cannot delegate leadership and passion the way you can delegate management tasks.  It is critical that leaders roll up their sleeves and work closely with the teams addressing these complex problems - not as the manager presiding over the work, but as a trusted and respected colleague. 

He illustrated his point with an example.  When launching a new effort, the people doing the work will often schedule periodic reviews with their manager at fixed intervals - say every three months.  That is all wrong he said.  Most the major decisions in a new initiative will get made in the first few months.  If the manager is a true leader - he or she will work closely with the team during that critical period, and do so - to whatever extent is possible, - as a peer of the members of the group, going to their offices and conference rooms where the real work is getting done. 

I can attest that Lou practiced what he talks about.  In 1996, in the first twelve months of the IBM Internet Division, we made a number of critical decisions.  We decided not to get involved in the browser wars then raging between Netscape and Microsoft.  We embraced Java, even though the technology had been developed by Sun Microsystems, one of our fiercest system competitors.  We shut down a number of the efforts aiming to position IBM as an Internet content provider.   We started to develop what became our successful e-business market strategy.  Throughout that period, I had lots of informal, working meetings with Lou and others in IBM's senior management team, debating back and forth the pros and cons of the different decisions we were making.

Lou Gerstner's visit to MIT was very stimulating and educational for all of us.  As Sloan Dean David Schmittlein said, we had just had a master's class in leadership from one of the very best business leaders in the world.

An Exciting New Challenge

At the beginning of March, I started to work with Citigroup as strategic advisor for innovation and technology.  This is a part-time position, which I will take on while continuing my current activities with IBM, MIT and Imperial College. 

When I retired from my full time position at IBM last May, my intent was to continue working pretty much full time, but instead of doing so at one company - as I had done for 37 years - I wanted to now do so by working closely with a few different institutions.  In particular, I wanted to split my formerly one-company job roughly three ways:  one third with IBM; one third with MIT and other universities; and one third doing something entirely different.  In addition, I wanted to continue my participation in various boards and committees.

The first two thirds of this equation has worked out very nicely since I started my post-retirement life in June, perhaps because they were essentially a continuation of activities I was already involved in.  The final piece of the puzzle took more time, but I believe it is now in place with my new relationship with Citigroup.

There are multiple reasons why working with Citigroup is appealing.  At the top is innovation, and in particular, how technologies are transforming whole businesses and industries.   This was, after all, the subject of my recent graduate seminar at MIT, which I will be offering again this coming Fall.

It is one thing to talk about how disruptive technologies are transforming an industry - it is another to be part of that industry, see it happen from the inside, and get personally involved in helping to formulate the proper strategies to take advantage of the disruptive transformations taking place all around us.  So, when the recently appointed CEO Vikram Pandit offered me the opportunity to come work at Citigroup - it did not take me long to accept.

My own professional career at IBM has been primarily marked by helping to bring disruptive innovations to market - like parallel supercomputing, the Internet, Linux, Grid Computing, and more recently, Services Sciences, Virtual Worlds and Cloud Computing.  The IT industry is what I know, and where I have worked for the last almost forty years.

In that time, I worked closely with a number of clients in various industries to help them take advantage of new technologies for their own transformations.  But now, I have an opportunity to do so from the inside in financial services - perhaps one of the fastest changing industries in the planet.

The world's attention has been focused on the carnage - if I may call it that - that the Internet and digital technologies continue to bring to the media and content, telecommunications, and consumer electronics industries.  Their fundamental technologies have gone from analog and physical, to digital and virtual in the last decade, causing everything to change, particularly their business models.

But, there is another very important technology that has been transforming from analog and physical to digital and virtual - money.  This is of course not new.  Credit cards and ATMs have been around for decades, both enabled by the rise of information technologies.  The Internet revolution of the last fifteen years has brought us online banking and online trading.  Just about every survey of IT usage by industry ranks financial services way up there among the leaders.  You would think that the financial services industry is through with its IT-based transformations - but in fact, this transformation is about to go into warp drive over the next few years.  The reason is the explosive growth of digital mobile devices.

We are surrounded with digital paying devices of all kinds:  EZ-pass and other road and congestion payment schemes in our cars;  Oyster cards in London, EZ-link in Singapore and many other similar smart payment cards around the world;  and of course, a multitude of credit cards, which we increasingly use instead of physical money everywhere.

The rise of mobile devices - cell phones, Blackberrys, iPhones and the like, could in principle converge all these various payment devices.  After all, as the music industry has been painfully learning, once your product is digital, software and the Internet will unleash a plethora of innovative ways of dealing with your previously analog product.

The digital payment battles are on.  Every vendor in every affected industry will be tempted to try to impose their own proprietary approach to mobile payments.  But, as history has shown with information technologies and other successful technologies that became ubiquitous in society over the years, such an approach does not work - at least for long.

You have to start looking at the problem and opportunity from the users point of view.  And most of us would prefer not to have to own and carry 57 different devices to deal with the various electronic payments in our lives.  It may not be just one - but the number of different payment devices we all would prefer to deal with is likely to be counted in single digits. 

I can imagine three, for example:  my payments-enabled mobile phone; a credit-card size smart card; and perhaps something in my car with a built in transponder, although the mobile phone can probably do that as well.  I may have forgotten a few additional ones here and there, but say - a half dozen such devices is not a bad number to aim for.  Needless to say, these devices have to be global in nature, and work everywhere. 

Do we know how to do this?  Well yes - the Internet, industry standards, and open source technologies have shown the way.  There is no technical reason why we cannot come up with a set of standards and open source implementations of those standards that would work around the world and could be embedded in mobile phones, smart cards and everything else involved in payments.

As we well know, the fierce battles will not be centered around technology, but around business models.  In particular, people often forget that disruptive innovations are truly disruptive.  Whole industries will be radically transformed.  Many companies will fight the changes instead of trying to figure out how to embrace the inevitable innovations, and build their new business models around them.

One of the appeals of working with Citigroup is that it is a very global company, doing business in over 100 countries around the world.  For example, just in my first week on the job, Citi and Korea’s SK Telecom announced the launch of Mobile Money Ventures, to jointly develop a comprehensive mobile phone platform that will enable the development of financial service and technologies to consumers around the world.

The US and US-based companies are not the leaders in mobile technologies and applications.  Those are happening elsewhere around the world, so it is nice to be involved with such a global company in addressing the technology and innovation opportunities.

This is all a big challenge and will require that I quickly learn lots of new things I don't know much about.  Luckily, I am surrounded by smart people already working on these problems who are teaching me the ropes.  This is truly a very exciting opportunity that I am looking forward to.

Social Pheromones and X-Reality

The MIT Media Lab is launching a new research initiative - X-Reality.  Broadly speaking, X-Reality will focus on the integration between the virtual and real worlds at several levels.  The new initiative aims to bring together related Media Lab projects in this new area, to share their diverse viewpoints and research approaches, and hopefully accelerate progress.  A series of weekly seminars has been organized, and I was invited to speak to the group a few weeks ago.  Let me share some of my comments.

I have believed for a while that the killer apps for new interactive, immersive, visual interfaces will be virtual meetings, and distance learning.  Everything else being equal, physical meetings and classroom learning are much preferred over their virtual and distance counterparts.  But, as we well know, this is not always possible, or even desirable.  That is why telecommunications and networks have been among the most successful technologies in history - from the telegraph and telephone, to the Internet and mobile devices.

It is stating the obvious to point out that many meetings cannot possibly be held in person, especially when the participants are in geographically distant locations, and when different meetings in the same day involve different people in different locations.  Moreover, many workers consider it a godsend not to have to travel hours just to attend a short meeting that they can more efficiently handle electronically from their homes or offices. 

So, the real research question is not which are better, virtual or physical meetings, distance or classroom learning.  Rather, the key question is: what is the right balance of physical and virtual interactions needed to have really effective working meetings and learning experiences?  We all pretty much agree that even though you often have to work with people that you have never physically met, it is far better to work with people that you have met physically at least once, and even better, that you continue to interact with them physically from time to time.

Why is that so?  Why is it important to have the proper balance between physical and virtual human interactions in good X-Reality applications?  One of the nice qualities of the Media Lab, which is justifiably renowned for its focus on leading edge innovation, is that no research question is off-limits, as they might perhaps be in more classic, formal departments.  So during the seminar, I raised the hypothesis that perhaps there is something like Social Pheromones that we humans exchange when we meet physically, which get imprinted in our brains and then make subsequent interactions, whether physical or virtual, more satisfying.

Pheromones are chemicals produced by living organisms that signal their presence and triggers a behavioral response in other members of the same species.  Pheromones are particularly associated with sexual attraction and reproduction, but they have also been identified in other activities very important to a group, such as raising an alarm when there are predators around, and properly delineating the group's territory.

I am using the term social pheromones not in its strict scientific sense involving chemical signals, but as a metaphor for all the signals - chemical, visual cues, verbal intonations, etc - that social animals, - including humans, - use for establishing the coherence of their group.  People clearly use lots of such non-verbal signals, and in fact, this is a serious area of study at the Media Lab.   The more we understand the social signals humans use for non-verbal communications, the more we should be able to explicitly use them in virtual interactions to facilitate those communications.   

You somehow expect that when you first meet someone physically, you imprint their persona in your brain, a kind of image formed through both explicit communications and implicit, non-verbal signals.  Subsequent interactions, whether physical, via phone, the Internet or anything else, will likely rely on the image of that person imprinted in our brain to provide a context for the interaction.  Thus, one might speculate that if we have never met the people physically and have only formed our mental image of them via virtual communications, the image is likely to be much less accurate, and the personal relationship will not quite work as well.

But, what is the right balance?  For example, more and more universities are establishing an international presence.  If you are teaching a course in an international outpost of your university, as is increasingly happening, what is the minimum number of physical interactions needed to have a satisfying learning experience?  How well would it work, for example, if a professor with small children, travels once a month to physically lecture while teaching the rest of the class from their home base through sophisticated distance learning platforms including virtual world interactions? 

Research into these X-Reality subjects is both fascinating and very important because we will learn not just a lot about how to have effective work and educational interactions, but our findings will enable us to develop far better virtual meetings and distance learning technologies and platforms.

We need something.  The Graphical User Interface (GUI) that continues to dominate the way we interact with most IT applications is over thirty years old.  Think of all the advances in every other area of IT over the same period.  A major reason I feel so positive about the potential of virtual worlds and related subjects is that after thirty years we need massive innovations in user interfaces.  I am hoping that these new visual and X-Reality technologies can eventually get us there.

Technology, Innovation and Social Action

A few months ago I received an e-mail inviting me to come talk to the Provost Council at St John's University.  St. John's "is one of America's leading Catholic universities – recognized for its superb academic programs, diverse student life, BIG EAST excitement and New York vitality."  The talk would be in their main campus in Queens, so it would be easy for me to drive there from my home.  Given that I like to visit and give talks in universities, I quickly accepted and we settled on a late February date.

They wanted me to talk on the applications of technology and innovation for social action -- in particular, how technology and innovation might be leveraged to eradicate poverty and to help those who do not have the basic needs of life.  St John's, they explained, was founded by the Vincentian Community in 1870.  The Vincentian Family is known for championing the needs of the poor.  They take their name and inspiration from St Vincent de Paul, a priest who lived during the 17th Century in France.  After learning of the hunger and the plight of the poor in the French countryside, he devoted himself to ministering to their needs.  He died in 1660 and was canonized in 1737. 

St. John's has launched a new initiative, the Vincentian Institute for Social Action (VISA).  They are reflecting on what it means to be a Vincentian institution in the 21st century.  They want to "become known worldwide for addressing issues or poverty and social justice."  They want to do so through "innovative teaching, research and service in a distinctively Vincentian approach, i.e., action and service with impact.”

As I have been repeatedly writing in this blog, I really believe that technology and innovation are now enabling us to address the most complex problems in science,  business and society.  What is more complex, - and more important, - than to consider how to best leverage technology and innovation to address the critical issues surrounding poverty and social justice?

So, I put together a talk on Social Action Innovation in the Knowledge Age.  After first discussing the new technologies and capabilities we now have at our disposal, I talked about their potential applications in four key areas that I have been writing about in this blog - lifelong learning, social business entrepreneurship, corporate social responsibility and soft power.  I will focus this blog on the first area – learning, - as I have recently posted entries on the other three and drew heavily on those entries in my St John’s talk.

 A recurring theme in this blog is the increasing importance of talent in the knowledge economy.  We know that literacy and education were critical in the transition from the agricultural to the industry society in the 19th and 20th centuries.  That is why public education and community libraries were introduced in the US and other countries.  Today however - in our transition to the Knowledge Age, literacy and formal education, while still absolutely necessary, are no longer sufficient.  Success in the 21st century requires sophisticated information analysis and problem-solving skills.  And it requires us to keep learning new skills throughout our lives.

But if literacy, information skills and lifelong learning have now become basic needs in society, what happens to those who through no fault of their own do not have the ability to learn?  Recent research using sophisticated functional magnetic resonance imaging (fMRI) has shown that if a young child does not receive the proper verbal stimulation - as is often the case with children from poor and disadvantaged environments - his or her brain will not develop properly.  Language development must be fostered early in children or it will be seriously impaired.

Recent research provides additional evidence.  At a February 15 news briefing, the American Association for the Advancement of Science (AAAS) said that " . . . impoverished conditions early in life could have dramatic affects on the brain's development and function.  Children who grow up in environments with family stress, negative social and environmental characteristics, and little cognitive stimulation may not fully develop brain areas critical for learning, memory, and language abilities, the panelists said.  Because poverty is generally associated with lower performance on many cognitive diagnostics, the researchers said poverty 'presumably plays a role in the persistence of poverty across generations.'"

Effectively, these new findings are saying that the brain of these disadvantaged little children has not been able to develop to properly process language and learn.  Yet, we are sending them to school where they will be taught via the classic verbally oriented mechanisms that teachers normally use.  Is there any wonder that so many of these poor children will not do well in school?   

How can we apply technology to help address these problems?  Language-based approaches are important, but they are only one channel into the brain.  At MIT's Media Lab, for example, there is considerable research underway to try to help people communicate through all the channels to the brain – channels with which new information technologies are now enabling us to experiment.  Let me give a few examples of work with which I am personally familiar. 

The Affective Computing group is exploring the development of personalized tools that would enable those who have difficulties communicating verbally to interact better through a variety of visual and other nonverbal mechanisms.  This could include many people with autism, and perhaps many children coming from disadvantaged environments. The Sociable Media group is conducting research on how to create better social and visual online environments and interfaces for human communication.  And the Personal Robots group is developing social robots that interact, collaborate and learn with people as partners.

Projects like these and quite a number of others going on in universities and research labs around the world might come up with innovative breakthroughs that would give poor children a better chance to learn and thus escape poverty.

After discussing the three other areas, I concluded my talk by proposing some potential ways of bringing technology and innovation to bear on social action. 

• Focus on technology-based innovations to help address the impediments for people to live a better life. 
• Bring a more balanced approach – beyond a pure focus on profits - to business and business education, based on open, market principles; and
• Leverage new social, collaborative technologies to help people around the world become better educated, integrated into global communities, and have a more hopeful future.

I think that Vincent de Paul would approve of such a plan of action.

(Just about) All Innovation is Local

At an innovation conference in Mexico in November of 2006, the Colombian journalist Alejandro Santos reminded us, in his eloquent summary, of the advice that the great Leo Tolstoy gave to prospective writers:  "Describe your village, and you will be universal."  Santos illustrated Tolstoy's maxim with the Colombian writer Gabriel Garcia Marquez, winner of the 1982 Nobel Prize in Literature, whose world-renowned novel One Hundred Years of Solitude takes place in Arataca, the small river village of his childhood.

In other words, to come up with a successful innovation, capable of being appreciated by people around the world, you need something very compelling to offer those global markets.  And where do you find such innovative, compelling ideas?  Sometimes the answer is in world-class research labs.  But often, the best new ideas are found in those areas that you know best - right around you.

Global aspirations need to be grounded in local actions.

Given the importance of new technologies in driving innovation, it is not surprising that over the last forty years we have seen the rise to prominence of Silicon Valley, Boston and a few other technology-based innovation hubs built around the great engineering universities in their midst - Stanford and UC Berkeley, and MIT, respectively.  After all, there is, arguably, nothing more universal than science and technology.  We have also seen cities and regions around the world aiming to become "the next Silicon Valley" by attempting to emulate whatever has worked so well in the original Silicon Valley. 

Most such efforts have fallen short of their goals.  I think that they fail because while it is easy to focus on the global, universal aspects of the successful innovation hubs - great technologists, entrepreneurs and venture capitalists - they miss the very local, human elements that make it all work.  Over the decades, Silicon Valley and the Boston area have developed business relationships, social connections and local institutions that are critical to their success, and that are very difficult simply to copy and import.  These human connections are organic in nature, and have to be developed over time in each community, based on its individual flavor and style.

These subjects came up several times during a recent visit to Spain.  The main purpose for the trip was to participate in a forum in Barcelona on the impact of globalization on business strategy, co-sponsored by IBM and the IESE Business School.  IESE is a highly ranked, internationally oriented business school that offers a variety of MBA, PhD and executive education management programs.  The forum brought together a small number of corporate thought leaders, who along with IESE faculty members and IBM executives, discussed the opportunities, challenges and risks associated with globalization.

The IESE host for the event was Pankaj Ghemawat, who is a professor in the Harvard Business School, in addition to being a member of the IESE faculty.  Pankaj is a renowned expert in globalization and strategy.  He has just published a new book on the subject, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter.

Technologies, chiefly the Internet, have made it possible to bring together geographically remote people, information and business processes.  The Internet is indeed enabling the world to become increasingly integrated or flat.  It has made it possible for India, China and several other countries to become part of the global supply chain for services and manufacturing, helping to create a growing middle class in those countries and giving them a huge stake in the success of globalization.

But, in his opening remarks at the forum, Pankaj asked us to reflect on the realities of globalization.  How global are we really?  Does that mean - as someone said more than 150 years ago, - that since technology now enables you to break down nationalities and bring people around the world into close connection, that the world is now one, and that capital, like water, will tend to find a common level? 

He then proceeded to share a few facts with us.  If you look at the fraction of telephone calls and university students that are international as opposed to local, or the portion of a country's population consisting of immigrants versus native-born, the number is well below 5%.  The percentage for international capital is higher, as you would expect - it is easier to move money than people around.  But even there, the fraction of international direct and stock investments is a bit over 10%.  Trade is significantly higher - roughly around 25 - 30%.   And those numbers have not changed by large amounts over the years.

Globalization is indeed taking place, but we live in a state of semiglobalization, as Pankaj calls it, which lies somewhere between complete localization and complete globalization.  It is interesting to note that for almost all human and financial activities, the state of semiglobalization hovers around 10% or so - that is, 90% of the activities are local and 10% are global.  This is very important.  As Pankaj asks in Redefining Global Strategy:    

"Why do so many global strategies fail—despite companies’ powerful brands and other border-crossing advantages?  Seduced by market size, the illusion of a borderless, ‘flat’ world, and the allure of similarities, firms launch one-size-fits-all strategies.  But cross-border differences are larger than we often assume.  Most economic activity—including direct investment, tourism, and communication—happens locally, not internationally.  In this semiglobalized world, one-size-fits-all strategies don’t stand a chance.  Companies must instead reckon with cross-border differences."

In addition to attending the globalization forum, I participated in a number of other meetings in Madrid and Barcelona, mostly focused on innovation. 

There are quite a number of innovation efforts going on around Spain, and I was glad to hear that rather than any region trying to become the next Silicon Something, they are trying to discover their own individual strengths and build on them - the innovation equivalent of "describe your village and you will be universal."

Let me offer a couple of examples.  I visited Cotec in Madrid - ". . . a foundation rooted in the business world with the mission of contributing to the development of the nation by fostering technological innovation in companies and the Spanish society at large."  Cotec was founded in 1990 by a group of Spanish entrepreneurs at the suggestion of the King of Spain, Juan Carlos, who serves as its Honorary President and is quite involved in its activities.  The King's very visible support of Cotec and its mission is a great help in promoting a culture of technology-based innovation in Spain. 

One of the best examples of innovation in the country is Zara, which was founded and has its headquarters in Galicia, a region in the northwest of Spain.  Zara is one of the most successful retailers in the fashion industry, with more than one thousand stores in 68 countries around the world.  Its success is a result of its highly innovative business model and the supply chain and logistics built to support it, which have revolutionized the fashion industry. 

Zara has a very dynamic business model. No design stays in the stores more than four weeks.  Customers are encouraged to visit the store frequently to look at the constantly arriving new designs.  There is little need for the kinds of major markdowns that other stores are forced to implement.  How do they do it?

On average, it takes nine months to develop a new fashion product and get it into stores.  Zara is able to shrink that number to a remarkable four to five weeks.  Consequently, it can assess in real time how well its products are doing in its stores around the world and take action accordingly.  If after a week a product is not selling well, it is withdrawn from the stores and the orders are cancelled.  On the other hand, if a product proves hot, production is ramped up, and variations on its design are quickly pursued. 

To support its constantly changing fashion lineup, Zara had to develop a local supply chain for most of its products, rather than rely on faraway, lower-cost but slower-reacting suppliers, as most fashion houses do.  Zara employs a large number of in-house designers, and their most fashionable and frequently changing products are made in their own factories in Galicia and other nearby regions in Spain, which gives them the flexibility to start, stop, and modify production quickly.

One of the most important concepts in computer sciences is the principle of locality.  It means that the vast majority of the references that a computer program makes are to related data in nearby locations in storage.  Only a very small percentage of the time will the reference data not be there, and the computer then has to get it from a farther-away level of the storage hierarchy, which takes a lot longer than the local references.  Were it not for this principle of locality, computers would run much, much slower.

Perhaps we humans also have our own principle of locality.  Even the most global among us still spend most of our time and energy with our families, friends and colleagues right near our homes.  We get most of our nurturing and inspiration from our local base.  And, . . . it is this base that then enables us to go out and properly deal with the vast global world out there.

A Very Delicate Balance

I recently gave several talks on Technology-based Business Innovation that were based on the graduate seminar I taught at MIT last semester.  Teaching a new graduate course forces you to think really hard about what it is you want to communicate.  Trying to compress the content of thirteen, three-hour seminars into a one-hour talk forces you go the next step and think even harder about the very essence of your material.

So, what is the essence of Technology-based Business Innovation?  Why is it so very hard for any company beyond its young, entrepreneurial, adolescent years – say, ten to twenty or so - to continue to embrace the kinds of disruptive innovations that got it started and made it successful to begin with? 

As you would expect, there are no simple answers to these questions.  The more you reflect on what it takes to manage a business, the more you realize that it is very, very hard, involving lots of decisions - some small, some large.  While the people who manage companies are very smart for the most part, lots of the decisions they make do not work out - as a glance at the business section of your favorite papers will attest.  Why is that?

A start-up is all about upside and the future.  It is fighting hard to make it, and hopefully to be the discoverer of The Next Big Thing that will propel it to untold fame and riches.  As we know, the mortality rate of start-ups is quite high, but good entrepreneurs just pick themselves up and go on to the next new company and potential dream.

But for those who make it, especially those who make it big, the situation begins to change after a while.  They now have products, services, business partners, an installed base, marketplace brand and (hopefully) loyal customer relationships to protect and grow.  They have a revenue stream, investors, a stock price and financial expectations to meet - quarter after quarter after quarter.  They have employees, assets, an established organization and a corporate culture. 

Life is good, but it is also now fraught with peril.  Start-ups, now emerging from all corners of our increasingly flat world, are fighting to get their innovative new products and services into the marketplace.  They need customers, revenues and profits.  And most likely, the easiest place to find them is to take them away from the established leaders.  Each of them just wants a small slice of your market share at first, with more to follow for those good or lucky enough to get established.

As we know, there is only one answer - innovation.  Marketplace leaders must embrace the disruptive innovations being used against them by hungry start-ups - or else.  Sounds easy enough.  But, as it turns out, it is amazingly difficult.

It almost seems as if there is a kind of life cycle in business.  Companies are born.  Many don't make it beyond a few years, but some do and over time become leaders in their industries, with growing revenues and market share.  Then, after a certain number of years, they start slowing down and stop innovating.  At that point, the invisible hand of the marketplace will often deem the business to be more valuable as a kind of carcass for fast-growing new companies to feed on, rather than as an ongoing, viable institution.  In other words - your time is up!!

In his seminal book, The Innovator's Dilemma, Clay Christensen succinctly wrote about the challenges that successful  companies face:  "They pour resources into their core business.  They listen to their best customers.  And in doing so, industry leaders get blindsided by disruptive innovations—new products, services, or business models that initially target small, seemingly unprofitable customer segments, but eventually evolve to take over the marketplace.  This is the innovator’s dilemma - and no company or industry is immune."

Successful companies - especially market leaders being chased by small and large competitors - must achieve a delicate balance between carefully managing their existing operations, and embracing disruptive innovations that will propel them into the future.  Operational excellence entails improving their existing products and services of the company with a string of incremental innovations that will add new features, lower cost and improve quality.  It means nurturing employees, business partners and customers, so they will all be happy to be associated with the company.  And it requires a strong focus on meeting the quarterly revenue, profit and cash expectations of their investors and the financial community.  Whether we like it or not, the consequences of not doing so are dire, indeed.

Operational excellence requires detailed analysis of technologies, quality, processes, competitors, customer satisfaction and market segments, and as such, is well suited for a hierarchic, disciplined style of management.  But managing an emergent business, especially one based on new, disruptive innovations, requires a very different style.  It cannot be based on rigorous information analysis, because in its early stages, there is little information to analyze.  There are lots of unknowns because, early on, it is not clear how the market for a new product or service will develop.  Consequently, managing disruptive innovations requires a management style based on establishing an early market presence and well-planned experimentation; close external collaborations with research communities, business partners and early adopters; and continuous refinement until it becomes clear what the company's strategy should be.

A lot of companies have trouble managing this delicate balance.  The operational demands are so intense, especially in the fast-moving, highly competitive and demanding times we live in, that just about all the efforts and funds of the company are spent managing their core business.  The management team is just flat out of time and energy to be able to nurture an emergent business opportunity with small revenues and a promising but unpredictable future.  By the time they notice that some new ideas are catching the attention of their customers, who are being courted by companies no one ever heard of, it is often too late to catch up.

Ideally, an established company can embrace a new innovation not by trying to act like the start-up it is not, but by figuring out how to leverage the new innovations to evolve its organization, culture and business models into the future.  How can you best leverage the skills and talent of the organization, while embracing the new ideas and market realities?  How can you leverage your installed base and customer relationships, so they become early adopters of the innovative new products and services?  How can you leverage the strengths of your brand, while infusing it with the new energy and freshness that accompany disruptive innovations?  And how can you leverage the strengths of the organization that have served you well all along, while leaving behind those parts that have become outmoded?  You want to make sure that the business is in harmony with the new forces out there in the marketplace.

These are tough questions, but they are the kinds of questions companies must successfully address as they formulate their long term strategies.  While there are many technical, market and financial issues, a company's entrenched culture is usually the biggest obstacle standing in their way.  But there is really no other way.  In the end, there is no alternative but to properly manage the delicate balance between excellence in its existing operations, and embracing disruptive innovations.

Enlightened Self-Interest

The January 19th issue of The Economist has a special report on Corporate Social Responsibility (CSR).  "Corporate social responsibility, once a do-gooding sideshow, is now seen as mainstream," the report starts out saying.  "Why the boom?" it later asks and proceeds to answer: "For a number of reasons, companies are having to work harder to protect their reputation - and, by extension, the environment in which they do business." 

The report further explains, "More than ever, companies are being watched.  Embarrassing news anywhere in the world - a child working on a piece of clothing with your company's brand on it, say - can be captured on camera and published everywhere in an instant, thanks to the Internet."  It continues, "As well as these external pressures, firms are also facing strong demand for CSR from their employees, so much so that it has become a serious part of the competition for talent."

Why should a business embrace CSR, not just as a feel-good part of its advertising campaigns, but as a value truly ingrained in its culture?  In the past, experts have argued against the concept from multiple points of view.  Some point out that CSR is a sideshow for a business, which diverts its energies from its number one - perhaps sole - objective: making money.  Milton Friedman, arguably the most influential economist in the second half of the 20th century, argued succinctly in a 1970 article that "the social responsibility of business is to increase its profits."  Others point out that when a business engages in social activities, it is essentially playing with other people's - its shareholders' - money.  Then there are those who claim that social actions for the common good are the proper responsibility of elected governments, not of business.  In their view, companies' claims regarding CSR should be viewed with suspicion.

I think that CSR is a fascinating subject, because it goes to the essence of what business is all about.  The top priority of a company has to be making money - otherwise it will just not survive.  However, to then describe a company as solely a profit-making machine feels very one-dimensional and somewhat old-fashioned.

First, the arguments presumes a relatively static relationship among business, government, communities and civil society at large – with each playing a pre-determined, unchanging role.  In this view, the role of business is to single-mindedly seek profits and shareholder returns, and the role of government is to provide the appropriate levels of control, a lot or a little depending on your political ideology. 

However, in the increasingly interconnected and globally integrated economy and society of the 21st century, those old boundaries are looking more and more porous, and those old roles are becoming a lot more complex.  More and more, governments have to do things that used to be the province of business – and vice-versa. 

Second, I think the arguments lack emotional intelligence. After all, a company is at heart an organization of people working together for some common objectives.  A company exists within an environment that involves the communities and nations where it does business; the various other companies with which it does business; and, of course, its customers and potential customers.  The company exists not just in an economic environment, but in a social and political one as well – and those are composed not of numbers but of people. Most of those people - employees, business partners, customers and neighbors - want more from a company than a profit-making machine.

Businesses spend considerable time, money and energy associating positive qualities with their brands in the marketplace.  The relationship between a brand and its customers is a complex one, full of emotional connections, associations, expectations - and chemistry.  Well managed companies know this, and have worked hard to establish a culture that balances the need to make profits with other positive attributes that attract people to want to be associated with the company and its products and services.  This is even more important in our times, due to two cosmic forces:  globalization - as more and more companies are doing business around the world and thus need to establish global brands; and the Internet - which enables a company's actions, especially its missteps, to be instantly communicated to all.

Let me offer some examples of why companies should embrace social responsibility in their culture and their brand, using the company I know best, IBM.  Take diversity, for example, something very personal to me, being both Cuban and Jewish.  IBM has a stellar record in supporting equal opportunities for its employees. 

For example, in 1953 IBM President Thomas J. Watson, Jr. published the company's first equal opportunity policy letter - one year before the U.S. Supreme Court decision in Brown vs. Board of Education and 11 years before the landmark Civil Rights Act - which said, "It is the policy of this organization to hire people who have the personality, talent and background necessary to fill a given job regardless of race, color or creed."  And he put IBM’s money where his mouth was – writing to two Southern governors that IBM refused to adopt “separate but equal” policies, and that if those states didn’t like that, IBM would locate its plants elsewhere.

IBM has continued to deepen its culture of diversity through the years, including company-wide diversity councils in eight areas: Asian, Black, Gay and Lesbian, Hispanic, Men, Native American, People with disabilities and Women.  I was a founding member of the Hispanic Leadership Council.

As we move toward an increasingly competitive, global, knowledge economy, a culture of diversity turns out to be one of the most important compeititve assets any company can possess.  You want to be able to attract the best possible talent to your company - the original motivation for Watson's 1953 opportunity letter - and highly talented people are increasingly diverse - both in your own country and in your workforce all over the world.  You also want to attract clients and partners from all over the world to want to do business with you - which they will be more inclined to do if they feel that you truly respect their country and are comfortable dealing with them as individuals.  Having had a culture of diversity for decades has made it very natural for all of us in IBM to work with different kinds of people from all over the world. 

How about the greening of corporate responsibility, - the awakening of business to take a serious look at the impact of their actions on the environment?  Green or sustainability initiatives are a major part of the expectations that society now has of socially responsible companies.  Are such initiatives just a matter of frittering away shareholders' money to satisfy a politically correct fad that will eventually move on to its next target?

Not really. That’s because environmental consciousness turns out to be efficiency consciousness, as well.  When companies look at their products and services through fresh eyes in an attempt to make everything they do much more efficient, they usually come up with disruptive innovations that enable them to pull ahead of their competitors and become leaders in their industries.  Green and sustainable initiatives are part of this tradition.  The disruptive innovations necessary to develop more energy-efficient and less wasteful products and services will prove highly beneficial to companies – far beyond helping them improve their social responsibility image.

IBM, for example, has started Project Big Green to reduce the energy consumption of data centers through innovative new technologies, products and services. A related initiative, Big Green Innovations, aims to bring advanced technologies and computational modeling to bear on emerging environmental opportunities, such as alternative energy, carbon management and water management.  In addition, IBM recently announced the formation of an Eco-Patents Commons, in partnership with Sony, Nokia and Pitney Bowes.  This public domain patent portfolio aims to encourage researchers, entrepreneurs and companies of all sizes to create products, processes and services in a way that will help to protect the environment.

In the end, as The Economist special report points out, "One way of looking at CSR is that it is part of what businesses need to do to keep up with (or, if possible, stay slightly ahead of) society's fast-changing expectations.  It is an aspect of taking care of a company's reputation, managing its risks and gaining a competitive edge.  This is what good managers ought to do anyway.  Doing it well may simply involve a clearer focus and greater effort than in the past, because information now spreads much more quickly and companies feel the heat.… Paying attention to CSR can amount to enlightened self-interest, something that over time will help to sustain profits for shareholders."

I could not agree more with the report's conclusion: "It is the interaction between a company's principles and its commercial competence that shapes the kind of business it will be."

Social Business Entrepreneurship

The other day, as I was driving back home from MIT, I turned on the radio, and by pure chance happened on an absolutely mesmerizing talk by Muhammad Yunus at one of the National Public Radio (NPR) stations in the Boston area.  The lecture I was listening to - “The End of Poverty: Because Poverty Is the Absence of Every Human Right” - was originally given at Boston University in October 2007.

Dr. Yunus is a Bangladeshi economist and the founder of the Grameen Bank, which he created in 1974 to help impoverished borrowers start small businesses and obtain an education.  He first loaned $27 to a small group of very poor Bangladeshi women, and gradually increased the number of loans.  He pioneered the revolutionary concept of micro-loans to help the poor in developing countries.  With these micro-loans, the poor are able to start very small businesses, and they can gradually improve their economic situations and start moving out of poverty.  Grameen Bank now has more than 7.5 million borrowers, and about 2/3 of the families receiving loans have risen above the poverty line.   

The banking system pioneered by Muhammad Yunus is now being used in more than 100 countries.  For his innovative economic and social development work, Dr. Yunus, along with Grameen Bank, was awarded the 2006 Nobel Peace Prize.  The prize announcement by the Nobel Peace committee said:

"Muhammad Yunus has shown himself to be a leader who has managed to translate visions into practical action for the benefit of millions of people, not only in Bangladesh, but also in many other countries.  Loans to poor people without any financial security had appeared to be an impossible idea.  From modest beginnings three decades ago, Yunus has, first and foremost through Grameen Bank, developed micro-credit into an ever more important instrument in the struggle against poverty.  Grameen Bank has been a source of ideas and models for the many institutions in the field of micro-credit that have sprung up around the world."

I met Dr. Yunus about eight years ago when I was co-chair of the President's IT Advisory Committee (PITAC).  We were having a PITAC meeting in Washington around the same time that Dr. Yunus was visiting then President Bill Clinton - who has long been a very strong supporter.  Dr. Yunus came to the PITAC meeting and talked to us about his work.  It was clear that we were in the presence of a very, very special individual.  You can see for yourself what I mean by watching this video of his Boston University lecture.

What I found particularly intriguing in the BU lecture I was listening to while driving was Dr. Yunus' concept of Social  Business Entrepreneurship.  He does not view the Grameen bank and related activities as charity.  He truly views them as businesses, albeit a somewhat different kind of business from the classic ones based on maximizing profits.

Some might find the notion of Social Business Entrepreneurship an oxymoron.  After all, isn't the pursuit of wealth the key to capitalism?  Didn't Adam Smith himself, the father of free-market, free-trade capitalism, argue in The Wealth of Nations that an individual pursuing his own self-interest will also promote the good of his community, through the principle that he called The Invisible Hand?

In addition to helping create the field of economics, Adam Smith was a very moral man.  While The Wealth of Nations is his opus magnum, Adam Smith wrote a number of other books, including The Theory of Moral Sentiments, where he argued that sympathy is required to achieve socially beneficial results.  Most serious students of Smith now agree that no contradiction exists between his advocacy of both self-interest and sympathy, because in his view "individuals in society find it in their self-interest to develop sympathy as they seek approval of what he calls the impartial spectator.  The self-interest he speaks of is not a narrow selfishness but something that involves sympathy.”

Dr. Yunus, who has a doctorate in economics from Vanderbilt University and who has taught economics in the US and Bangladesh, has very strong views on the subject.  He writes, "Many of the problems in the world remain unresolved because we continue to interpret capitalism too narrowly.  In this narrow interpretation we create a one-dimensional human being to play the role of entrepreneur.  We insulate him from other dimensions of life, such as religious, emotional, political dimensions.  He is dedicated to one mission in his business life - to maximize profit.  He is supported by masses of one-dimensional human beings who back him up with their investment money to achieve the same mission." 

But, he later adds, "everyday human beings are not one-dimensional entities, they are excitingly multi-dimensional and indeed very colourful. Their emotions, beliefs, priorities, behaviour patterns can be more aptly described by drawing analogy with the basic colours and millions of colours and shades they produce."  He wants to create a new type of entrepreneur, who is not just interested in profit-maximization but who is also totally committed to make a difference in the world and give a better chance in life to other people, not just through charity, but by creating social businesses.  These businesses may or may not earn a profit, but like other businesses, they must not incur a loss.  They must become self-sustaining.  Grameen Bank is such a social business.      

Dr. Yunus points out that, while there is now widespread acceptance that free markets, rather than the State, are the best mechanisms for the profit-making sector of the economy, somehow markets are considered to be utterly incapable of addressing social problems.  We have handed that responsibility to the State.  He strongly disagrees.  If markets are the best way to bring innovation and competition to the profit-making part of the economy, shouldn't markets be also viewed as potentially excellent mechanisms to bring innovation and competition to help address social problems?

He writes, "Not only is it not necessary to leave the market solely to the personal-gain seekers, it is extremely harmful to mankind as a whole to do that.  It is time to move away from the narrow interpretation of capitalism and broaden the concept of market by giving full recognition to Social Business Entrepreneurs (SBEs).  Once this is done, SBEs can flood the market and make the market work for social goals as efficiently as it does for personal goals."

Muhammad Yunus has shown us that there are fresh, new ways of thinking about the roles of markets and government, beyond the tired, outmoded labels of liberal and conservative.  Our societies face serious problems in the decades ahead.  For those of us who strongly believe in th