Winning in the Creative Economy: The Global Innovation Agenda

1
Winning in the Creative Economy The Global
Innovation Agenda

• Edward G. Newman
• Global Strategic Corporation
• Fairfax, Virginia
• May 20th, 2005

2
The Challenges for Business Leadership

• Commoditization is everywhere and increasing
• Asia is defining much of the global competitive
  agenda
• The U.S. dominates the supply chain arena to date
• Outsourcing has become core, not peripheral, to
  more and more areas of business and IT

3
The four main drivers of business
Market-shaping (de)regulation
Capability sourcing
Coordination technology
Standardized interfaces
4
The four main drivers of business
Market-shaping (de)regulation
The commodity trap
Capability sourcing
Coordination technology
Standardized interfaces
5
The four main drivers of business
Market-shaping (de)regulation
The commodity trap
The innovation necessity
Capability sourcing
Coordination technology
Standardized interfaces
6
Commoditization price erosion (1)

• The China Price What you charge minus 30
• Consumer electronics prices of component parts
  drops 1 percent per week, on average it used to
  take ten years for the price of a product to drop
  from 1,000 to 100 now it takes eighteen
  months.
• Security trades 1996-2002, margins dropped by 50
  percent.
• Telecommunications the deregulation of long
  distance phone services in any country typically
  cuts prices by 40 percent within five years.  
• Automotive price of cars has grown slower than
  inflation since 1994

7
Price erosion (2)

• Clothing the price of mens jeans has dropped by
  over 40 percent in five years. For retailers,
  double figure margins are now in single digits in
  a good year
• Financial services in 1999, the average fee to
  send 300 from the U.S. to Mexico was 60, in
  2004, under 10.
• Groceries prices in an area drop by 13-16
  percent when Wal-Mart enters the neighborhood
• Manufacturing The prices of goods made in Hong
  Kong, Singapore, Taiwan and South Korea fell by
  22 percent between 1996 and 2002. Half the
  worlds manufacturing is now carried out in Asia
  versus around 20 percent two decades ago.
• BUT energy costs do not commoditize and
  often cannot be passed on (e.g., airlines) this
  is the real China Syndrome 

8
The global search for capabilities e-Big

• Relative labor cost
  burden
• Low
  High
• Premium Specialist
  Creative
• Skill capabilities
  economy
• base
• Commodity Assembly Outsourcing
• economy
  crisis
• 
  creator

9
So who does make money?

• Three exemplars Dell, Southwest, Wal-Mart
• Returns to shareholders around 16,000
• Dominate their ecosystem competitors strategies
  based less on their own ambitions than to find a
  counterpunch
• Yet, there is no way they could ever make money
• No proprietary product or service
• In commodity industries
• Self-commoditizing drive their own prices down,
  push the industry to follow

10
The coordination edge

• All three companies have an explicit enterprise
  coordination design owned at the top
• Dell complete synchronization of the demand
  chain, patented processes
• Wal-Mart supply chain/store replenishment
  integration end-to-end
• Southwest standardization of operations,
  incentive systems
• All three are superb users not of IT
  information technology,
• but CT coordination technology

11
Value webs versus chains
Value chain Tidy, linear Control-centered Supply
-driven
Firm Infrastructure
Firm Infrastructure
Human Resource Management
Human Resource Management
Technology Development
Technology Development
Procurement
Procurement
Inbound
Outbound
Inbound
Outbound
Operations
Marketing
Operations
Marketing
Service
Service
Logistics
Logistics
Logistics
Logistics
Sales
Sales
Value webs Demand-driven, power
laws Nonlinear Scale-free networks Yahoo, UPS
as Hubble Space
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The Coordination Technology Platform
 
SUPERSTRUCTURES Enterprise value enablers
Competitive growth engines  
Super Infra Sub
INFRASTRUCTURES CT-enabled capabilities Process
agility, integration
SUBSTRUCTURES Foundations You dont need to
know
 
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The CT resource Substructures
 
SUBSTRUCTURES Highly standardized foundations
heat, power and light systems Automatically
interconnected via standardized interfaces The
Web as electricity Largely usage-based
variable cost Partner with the best
Specialists, natural integrators
Super Infra Sub
 
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The CT resourceInfrastructures
 
INFRASTRUCTURES Clusters of services, Networks
of providers and partners business-, industry-
or partnership-focused arrangements Technology
anticipation Beachheads (RFID, transitional Web
services, mobile commerce, VOIP)  
Super Infra Sub
 
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The CT resourceSuperstructures
 
SUPERSTRUCTURES Priority capability targets
customer relationships, supply chain,
financial, organizational, operational
Branding Innovation paths Bundling of
distinctive capabilities via infrastructure
clusters Process edge differentiation  
Super Infra Sub
 
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The new competitive games

• Design
• Branding
• Engineering
• Manufacturing
• Supply chain
• Customer experience design
• Which of these commoditize? Which are part of the
  creative economy?
• Do you run the risk of winning in the
  manufacturing and engineering game and losing the
  global logistics game?

17
The logistics revolution

• Supply chain leaders (Dell, Wal-Mart, Toyota)
  have a 50 edge in
• Working capital
• Overhead
• Inventory
• Cash cycle
• Revenue per employee
• Administration
• How do you compete against a 50 financial edge?

18
The bigger picture Business growth as oxymoron 

• Of the 172 companies that had at some point been
  on the Fortune 50 list between 1955 and 1995,
  only 5 grew their revenues above the overall
  inflation rate.
• Just 13 of a sample of 1,854 companies grew
  consistently over a ten-year period.
• Only 16 of 1,008 companies tracked from 1962 to
  1998 survived.
• Of the original Forbes 100 announced in 1917,
  just one of the 68 companies still on the list in
  1987 GE had surpassed the average return on
  the SP 500 over the seventy year period.
• From 1997 to 2002, the 30 firms that constituted
  the Dow Jones index grew at a rate of under 5 in
  revenues and gross profits and just 0.5 in
  after-tax profits.

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Conclusion

• Every company is affected by the forces of
  commoditization innovate or die!
• Any city, region or nation anywhere can be eBig
• The winners fit all of the pieces together
  infrastructures, technology, logistics, the
  customer experience

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Action Plan

• Create strategic technology roadmaps
• Create strategic markets roadmaps by
• Region
• Nation
• Industry
• Company
• Create national policy and back it strongly
• Create industry and cross industry standards,
  such as the Universal Information Interface
  (UII)
• Establish Bled Manifest for region
• Create buy-in from all segments
• Execute sooner than later
• In essence, create a Marshall Plan for
  innovation!