Customer Reviews

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

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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.

Not being a specialist in business strategy I thought there was a lot of great material with excellent insights and analysis in this book, but I would have liked to see more examples or case studies that supported their views. I was suprised that after a slow start the sections on dynamic specialization and productive friction were brilliant and I think even surpass Clayton Christenson's anaylsis of the mechanisms of innovation inside corporate cultures.

In the early parts of the book, particularly the acknowledgements, it appeared that this might be another treatise on how great outsourcing is, but no matter where one stands on the issue it's established that it's a fact of life for corporate america and that the business strategy to leverage specialization outside your core competencies is going to determine future success. To take Paul Graham's analogy a bit further" "Companies are going to learn about outsourcing and specialization the same way a gene pool learns about new environmental conditions."

There's a lot of great insight to take away from The Sustainable Edge, though I wish there were more examples that illustrate their ideas.

John Hagel is a Senior Advisor at McKinsey & Company. For two decades, John Seely Brown was Executive Director of the legendary Palo Alto Research Center. The authors argue that the only sustainable edge is to generate shareholder value through constant innovation. Current approaches to strategic thinking are inadequate to the task.

The book has one irritating quality and one large value for Board members.

This is a small booked packed with lots of ideas. I was distracted by the use of "new words" to describe old concepts. It is almost as though the authors are trying to invent a new vocabulary using concepts that could be best explained in plain English. Examples of this business psychobabble include "radical incrementalism," "performance fabrics," "process networks," and "productive friction." These are really not new concepts but they have invented new words. I want to read a business book that would help me improve my company's effectiveness. I didn't sign up to learn a new language.

The good news is that Boards and CEOs ought to carefully consider their matrixed approach to talking about strategy. They call this matrixed approach "dynamic specialization."

The current fad is to talk about business models organized along industry lines. The authors argue that industry focus is insufficient for a proper conversation about strategy. Within that industry-focused model, there needs to be a second strategic focus.

They see this new strategic focus along three dimensions:

Infrastructure Management. Financial services, pharmaceuticals, and the computer industry are already structured in significant ways along these lines. State Street Corporation is an example of a company that services the financial services industry but its value clearly revolves around infrastructure management. UPS revolves around infrastructure management of logistics. An infrastructure management theme works well for relatively routine, high volume business activities.

Product Innovation. Specialized biotech companies are taking on more of R&D activities so that large pharmaceutical companies can focus on scale intensive manufacturing and distribution. There are specialty design shops that serve the fashion industry. There are specialty semiconductor design shops that serve the electronics industry.

Customer Relationship. These firms concentrate on identifying target customer segments, getting to know that segment very well, and using its resources to mobilize third party products and services to address the needs of their customers. Physicians who practice general medicine, financial planners, real estate agents, and attorneys all provide this framework. Accenture is a company with this type of framework.

From a strategic perspective, most companies today like to say that they do all three types of services within their walls. But each approach requires different economics, different skills, and different cultures. When Boards accept the CEOs notion that all three models are appropriate in the strategic mix, the inevitable implication is sub optimization of one or all of these strategies.

This sub optimization increases company vulnerability to its more focused competitors.


Laurence J. Stybel
Boardoptions.com
lstybel@boardoptions.com

This book is a must read, because the thoughts and ideas are provocative. The target audience, I believe, is the strategic decision maker for the enterprise.

For example, the assertion that offshoring is here to stay and that as a business trend, it is the first of a 4-phase phenomenon. The book logically outlines the concept that enterprises initially offshore for cost advantage, but could end up bringing back value-added goods and services to the host market. This is not obvious to many first time offshoring firms. Strategy that does not support the 4-phase phenomenon might end up being more expensive.

Or the idea that Service Oriented Architecture can be enabled technologically, today; but needs cultural change within the enterprise to be effective.

The book includes some real treasures if you take the time to take a careful read. That Wipro and Infosys use different software methodologies for different industries is a fact that aspiring offshore firms might want to consider while reviewing their strategic investment options.

Even some of the concepts that are not entirely new, such as 'dynamic specialization' have been presented in an effective blend of conventional corporate wisdom and new insight. This makes it worth one's while reviewing these chapters, even if one does not entirely agree with the conclusions. If nothing else, these are as good an explanation as any of some of the startling business results we see, such as the success of the Chinese motorcycle or the Indian software industry.

There are also plenty of other useful nuggets, for example the clarification of the difference between 'offshoring' and 'outsourcing', two terms very commonly used synonymously.

I like the fact that each chapter concludes with a 'bottom line' section - the one on offshoring recommends that the executive team do site visits to to the offshore location before making any long term decisions. As a pointer, I believe this is invaluable and follows directly from the arguments (on cultural differences) in that chapter.

On the whole I strongly recommend this book to anyone who appreciates a different point of view that stimulates thought.

This book caught my eye in an airport bookstore because I know the authors, and I was compelled to buy it when I read the teaser question in the book's jacket asking "are you working harder to create less value?" Since this is the question implicit in most conversations I have with CIOs around the world, I was quite interested to read what these two luminaries had to say.

Quite a lot, as it happens, and all of it quite good. In fact, the only real short-coming of this book is that it's missing a chapter on open source software written by me! Maybe the next edition...

The book is the model of what I consider a great business book to be. It tells you everything you need to know in summary form in Chapter One, and then it goes into successive layers/dimensions of detail in subsequent chapters. The voice and diction of the authors is crystal-clear Harvard Business Press style, the editing superb, and the research is illuminating and provocative yet relevant. Nowhere does any part of this book argue against itself, nor does the book become a painful and patronizing repetition of its Chapter One premise.

So why not give it 5 stars? The only reason is because these authors are *so good* that they cannot be excused for missing a most obvious example of their premise: the emergence of open source software as a major trend in enterprise IT. True, the book was researched in 2003 (when enterprise open source was in its infancy) and published in 2005 (when enterprise open source was still fairly young), but these guys had the *audacity* to make some statements about value creation and value destruction among S&P 500 companies over the past 75 years, and they had the courage to say "well, almost. The financial services firms don't fit our premise, but we are more sure of our premise than their SEC-certified reports, so we're going to throw out their data and explain what our premise teaches about the non-financial sectors of the S&P." Needless to say, two years later the financial services sector would enable the destruction of twelve trillion dollars of wealth in America, and with those losses, the terrible value performance of that sector post 2007 matches the terrible performance of so many other sectors from the 1930s to 2005.

How could a team who could develop a hypothesis so penetrating a hypothesis as to mistrust the banks in 2005 fail to see the remarkable growth of open source software as the most important validation of that hypothesis at that same time (and the growth of its most successful pracitioner, Red Hat, to become an S&P 500 company in 2009)? A very specific quibble, I admit!

But that aside, this book is the must-read book on competition and strategy for the 21st century. I still hold Michael Porter's Competitive Strategy: Techniques for Analyzing Industries and Competitors in very high regard--it is the standard--but The Only Sustainable Edge provides a necessary update to that book by recognizing how Moore's Law, Metcalfe's Law, and other modern phenomena have forever altered the competitive context in which all businesses now operate. The insights contained within this book are among the best I have found in any business book I've read since reading Porter.

Hagel and Brown have written an amazing book - it is hard to capture its full richness because it covers so many themes in interesting and thought-provoking ways. It's a book about offshoring, globalization, business strategy, innovation, the role of IT in enabling new business capabilities and public policy.

What really intrigued me is their perspective on business innovation. We tend to view innovation as something that occurs within a company and usually associate it with breakthrough product innovation. Hagel and Brown urge us to reconsider what innovation is and where and how it occurs. Rather than emphasizing breakthrough product innovation, they urge us to think more about rapid incremental innovation of business processes and practices - as well as products. They make a strong case that the most powerful spawning grounds for this kind of innovation are at the edge - the edge of business processes, the edge of the enterprise and the geographic edge as represented in large emerging economies like China and India. Particularly provocative is their view that China and India are becoming catalysts for exactly this kind of rapid incremental innovation - and that Western companies are thinking much too narrowly about these economies as just sources of revenue growth.

They suggest that new management techniques are required to harness this potential for innovation. In particular, they focus on the role of "productive friction" as a way to drive innovation across enterprises. To illustrate the concept of productive friction, they give fascinating examples from industries as diverse as motorcycles and flat panel displays.

When most companies think about innovation across enterprises, they typically focus on "deals" or specific innovation projects. Hagel and Brown push us to build long-term, trust-based relationships across multiple enterprises to support sustained innovation. It is a much more ambitious undertaking, but they make a convincing case that this really is the only sustainable edge as we face more competition on a global scale. Rather than seeing competitive advantage erode, Hagel and Brown believe that companies can actually build even more substantial forms of advantage through learning how to get better faster by working with others. This is a "must read" book for anyone interested in business or the world we live in.

Despite the rather long winding title/subtitle - I think this is an interesting book that talks about the impact of new technologies and of the emergence of the low-cost economies on management of the supply chain. Its perhaps just a coincidence that this book was published just prior to the announcement by Apple of their move from IBM-PowerPC to Intel chips. This book covers some of the inherent reasons behind that move. This book read along with the Thomas Friedman's treatise on "flat world" should help us develop a very good picture of today's economic environment and how it will affect the design and development of today's and tomorrow's supply chains and organisations.

Lately there has been a real absence of new ideas for business and this book seeks to fill the void. It succeeds in some areas notably the notions of specialization, agility, capability etc.

The general gist of the book is that in an enviornment of intense global competition that the only sustainable competitive advantage is the ability to change.

On a chapter by chapter basis, the first chapter "Beyond Margin Squeeze" sets the forces that are creating this new environment where traditional notions of competition such as product, brand and geography are giving way. Its a good summarization of the environment facing most companies.

The second chapter on outsourcing tries to expand the outsourcing view from one of cost (labor arbitration) to skill acquisition. The authors try, but this chapter is not really convicing enough to change the view and conventional wisdom on outsourcing.

The third chapter is perhaps the best in shaping what it really means to be a dynamic company. You can use the word agile, but the gist is that you need to look at the company differently if it is going to compete by being able to change and fit with the market.

The remaing chapters keep this book from being a 5 as they rehash some of the authors prior ideas and thoughts.

So, the first part of this book is great for those who want to put some shape and substance onto the evolving consumer, global world and what it means to the enterprise remaining successful.

If you are facing the need to point out the need for a signfiicant change in the way you structure, run and organize your business, then the first part of this book is the best set of new ideas to hit the market in a long time.