The Only Sustainable Edge: Why Business Strategy Depends On Productive Friction And Dynamic Specialization [Hardcover]

If you feel that you miss (...), Enron and the other excesses of the the late 90's, please buy this book. Otherwise, don't.

Hagel and Brown are two well pedigreed authors, and they attempt to explain their view on what is the next frontier in corporate strategy. The answer is that value of the firm lies not inside the firm but at its edge. The edge is a broad metaphor for geography (India, China and Brazil), maturity (old econ and new economy), physical edge (inside the firm as well the partners outside).

The key insights from this book are

- Two types of forces have converged to squeeze margins -Informational technology, and Public policy shifts. Try telling this to the 500,000 people who have lost their jobs in the valley.

- Three key elements of the new model for business strategy are
- A. Reconveive sources of strategic advantages by accelerated capability building across boundaries. This implies - Dynamic specialization, Connection and Coordination of 3rd parties and Leveraged capability building. Elaborated using the Li & Fung, Hong Kong retailer example.
- B. Master new mechanisms to build advantages - This implies focusing on efficiency as well as effectiveness, process outsourcing and offshoring, loose coupling of extended business processes and production friction
- C. Adopt new approaches for developing strategy

- Given this framework, conduct a diagnostic that inventories the key initiatives for the last 12 months, as well as the proposed initiatives for the next 5 years. At the end of this diagnostic, you should be able to identify what activities you can offshore and outsource and therefore you can dynamically specialize.

- Process networks is predicated on loose coupling of processes and Productive friction. Productive friction can be decomposed into four factors, Performance Metrics, People, Prototypes, and Pattern Recognition.
- Process networks are enabled by performance fabrics and IT is critical in achieving a solid performance fabric. Web services is critical in implementing this new fabric.

Hagel and Brown have transformed a solid Harvard Business Review paper into a 200 page book that does not do sufficient justice to the expended ink. The approach is geared towards policy wonks at think-tanks rather than day-to-day business manager trying to compete in a flattening world. The authors do not provide prescriptive advise that can be implemented easily. Their case examples are shallow and do not reflect the points well. I would have preferred if the authors take their core argument and apply it to a business unit within a Fortune 500 organization and experiment with their strategy before writing this book.

To the busy executive, one less book that is cluttering our target reading lists.

Your searching for practical strategic ideas,
Fred "Grounding" Sanford

Previously, I read and then reviewed three books co-authored by Hagel which I greatly admire. Specifically, Net Worth, Net Gain, and Out of the Box. In this most recently published volume, Hagel and Brown assert that effective business strategy "depends on productive friction and dynamic specialization." As I began to read this book, I was curious to observe how Hagel and Brown formulate and then present what they call a "compelling case [for reshaping] the business landscape -- where and how value and profit get created -- to create a scalable catalyst for broader institutional and policy changes."

For them, "edge" has several dimensions. "First, we mean the edge of the enterprise, where one company interfaces or interacts with another economic entity and where it currently generates marginal revenues rather than the core of its profits. Second, the edge refers to the boundaries of mature markets as well as industries, where they may overlap, collapse, or converge...[Third], geographic edges, especially those of such emerging economies as China and India, where consumers of all kinds crave Western goods and services that will ease their burdens and improve their lives. Finally, we refer to the edges between generations, where younger consumers and employees, shaped by pervasive information technology, are learning, consuming, and collaborating with each other and where baby boomers are preparing to retire or switch careers over the next decade."

Hagel and Brown explain how to build a sustainable competitive advantage by focusing on three broad strategic imperatives: dynamic specialization, connectivity and coordination, and leveraged capability building. Of special interest to me is what they have to say about process outsourcing and offshoring, loose coupling of extended business processes, and what they call "productive friction." Many of those who reads this book will derive substantial benefit from completing three "quick audits" (pages 26-29) because they will help those who comprise a senior management team to build a shared view of where their organization is. Only then can an appropriate strategy (or strategies) be formulated and then implemented to get that organization where it needs to be.

By the way, according to research which Robert S. Kaplan and David P. Norton provide in The Strategy-Focused Organization, only 5% of the workforce understand their company's strategy, only 25% of managers have incentives linked to strategy, 60% of organizations don't link budgets to strategy, and 85% of executive teams spend less than one hour per month discussing strategy. If true, these are chilling statistics which suggest that few decision-makers in any organization (regardless of its size or nature) would be able to answer, clearly and realistically, questions such as these when completing a migration path audit:

What have been the five most important operating initiatives -- based on resource commitments -- during the past twelve months?

How to characterize each of the five initiatives in terms of its efficiency, specialization, coordination of third-party resources, and accelerating capability building across enterprises?

Based on a calendar review of executive involvement, how much time was spent over the past twelve months discussing the four elements of each operating issue?

Approximately what were the resources committed to these four elements across the five operating initiatives?

When you next participate in a group discussion of strategic planning, ask questions such as these. The silence which follows will be almost deafening.

As indicated earlier in this brief commentary, when Hagel and Brown refer to "the only sustainable edge," they do so in terms of four separate but closely related dimensions. It is important to keep that in mind as you follow their narrative through seven chapters to the Epilogue. It is also helpful to remember that Hagel and Brown are intrigued by an often troublesome but irrevocable convergence as digital information technology expands both within the enterprise and beyond through global communication networks as public policy in diverse domains continues to shift and thereby intensify competition on a global scale.

When formulating new approaches to developing strategy, Hagel and Brown suggest, first build alignment on the long-term direction of the company. (They pose three excellent questions on page 160. Can you answer them?) "To sustain a meaningful longer-term direction, explicitly identify what you will not do as a business. Most companies will probably shed areas of activities for which other firms have developed world-class capabilities." Next, build alignment around near-term operating initiatives. (There are two more excellent questions on page 162.) Then identify and address major organizational barriers. Finally, create tight performance feedback loops. I think it would be a serious mistake to think that this recommended process is relevant only to larger organizations, especially those competing or at least operating on a global scale. The information and counsel they provide as well as the questions they pose will be of substantial value to decision-makers in any organization, whatever its size or nature.

In their Epilogue, they shift their (and the reader's) attention to still another of those questions which are so easy to ask but so difficult to answer: How to recast public policy to develop talent? The suggestions they offer are eminently sensible and best revealed within the context created for them. Of special interest to me is the fact Hagel and Brown seem to function so effectively on both the macro and micro levels. Although they provide an abundance of specifics throughout their brilliant book, they always have the so-called Big Picture in mind. This is especially evident in the remarks with which they conclude The Only Sustainable Edge:

"By focusing on talent development, policy makers can help individuals in their society more effectively realize their full potential. But the benefits extend far beyond this. Talent development, especially when situated in economic activity, can drive improved productivity and, in turn, enhance the standard of living in any society. Even more broadly, a focus on talent development helps attract highly motivated and creative people and provides them with the resources and time to develop a rich and evolving cultural and social environment. Talent development is an ongoing race, but those who lead the race will unleash passion and rewards that will make the race worth winning."

Those who share my high regard for this book are urged to check out the works co-authored by Kaplan and Norton (especially The Strategy-Focused Organization) as well as Don Mankin and Susan G. Cohen's Business Without Boundaries: An Action Framework for Collaborating Across Time, Distance, Organization, and Culture, Robert Simons' Levers of Organization Design: How Managers Use Accountability Systems For Greater Performance and Commitment, and Strategy Safari: A Guided Tour Through The Wilds of Strategic Management co-authored by Henry Mintzberg, Bruce Ahlstrand, and Joseph Lampel.

Full disclosure: I don't have an MBA. I've never been to business school. When I hear the word "metrics", my eyes tend to glaze over like those of the rabbits that hang upside down outside butcher shops in certain parts of New York City. But business books are where forward-looking thinkers are incorporating key insights from Chaos Theory and complexity to create new models - that's why I read them. And John Hagel and John Seely Brown are the most forward-looking - and up-, down- and side-ways looking - of all those I've read.

The authors also demonstrate unusual depth. On the surface, "The Only Sustainable Edge" is your passport to a globalized world: the authors take you to China, India and other locales normally seen as far-off places to which we off-shore and/or out-source (the authors nicely distinguish between those two practices) and show us, instead, the specific conditions and cultural traits in those countries that create innovative practices we could learn from. But what gives this book such deep resonance is its underlying vision of a globalized world and the shift in theory and practice its operating principles demand. Because the tropes the authors use are brilliantly complex - they encode so much information - you can't help but grasp the implications. Take just these three examples:

"DYNAMIC SPECIALIZATION": The pre-globalized world world was divided into what Isaiah Berlin called "hedgehogs" - generalists, who know a little about a lot of things; and "foxes" - specialists, who know a lot about one thing. In a globalized world, the specialist is neither fox nor hedgehog: the specialist must know a lot about one thing...and how it works in many, many different contexts. To (I can't believe I'm using this word) grok the specialist as a boundary-crosser, moving laterally across a broad spectrum, is also to understand the shift from a vertical to a horizontal focus (what Thomas Friedman calls "flattening"). Likewise, the transcendence of the fox/hedgehog paradigm suggests that oppositional constructs themselves may be passé. Indeed, throughout the book, the authors look to maintain the tension between opposites rather than resolve the tension either one way or the other. (Thus, unlike the early enthusiasts of chaos theory, who replaced "things" with "flow", Hagel and JSB have a healthy respect for both.)

2) "PERFORMANCE FABRIC": Pre-globalization, growth was measured size and/or efficiency. In a globalized world, growth is measured by complexity. You grow by deepening and broadening your connections, forming new partnerships, entering into new collaborations, growing one's skills across many more contexts. That tapestry of connections is what Hagel and JSB call "a performance fabric". I'd be tempted to say that the richer the tapestry, the richer the company and its shareholders, but now I'm thinking "tapestry" doesn't do justice to the elasticity of the performance fabric. Perhaps "trampoline" would be better - it gives you that added bounce you need to vault into a higher stratosphere, a higher level of complexity. (Perhaps it could be said that in a globalized world, companies have to grow up.)

3) "PRODUCTIVE FRICTION": Pre-globalization, boundaries were thought to be hard and fast, built like moats around a castle to protect one's enterprise against competitors, predators (or pirates) and/or regulatory bodies. In a globalized world, boundaries are points of connections as well as separation. Companies and individuals have to collaborate with competitors. Those working in and with countries that have different ideas of property and the boundaries we create to protect property, need to negotiate boundaries rather than impose them. Rubbing up against each other in this way creates friction, but, as anyone who's ever watched "Survivor" knows, rubbing two sticks together produces fire. Likewise, productive friction sparks new ideas and new solutions.

In fact, I had my own experience of productive friction reading this book. While I sometimes found the going difficult, rubbing up against the unfamiliar business syntax and vocabulary produced a fireworks of thoughts and images. That mine had less to do with the business models Hagel and JSB are proposing than with the social model I was extrapolating from it was inevitable because, as the authors themselves suggest, much of the information in this book translates immediately to the social arena. How could it not, given that the underlying principles are the same? If the abilities to be sensitive to your surroundings, to respond quickly to change, to be able to negotiate tension rather than to try to resolve it either one way or the other are crucial to the success of companies and workers in a globalized world, how could they not be useful for its citizens as well?

That said, this is a business book. Hagel and JSB focus on the business model and leave the social model to the reader's imagination. They provide companies with criteria by which they can analyze their strengths and weaknesses and offer a host of best practices - both of American companies and those of other countries - to help companies compete and grow in a globalized world. Neophyte that I am, I can only presume the value of these precepts to business. But as a shareholder in some of those companies, I'm prepared to hold them accountable to the standards set forth in this book.

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