The Hindu Business Line : Value opportunities lie at the edges

Companies that "find themselves walking a fine line between significant value creation and commensurate value destruction" may find some survival lessons in The Only Sustainable Edge, while another book Capitalism at the Crossroads assu res us that salvation lies in the hands of `sustainable global enterprise' that makes profits and raises the quality of life. Books to sustain you through the weekend, says D. Murali.

IS YOUR company working harder to create less value? With this direct question begins The Only Sustainable Edge, by John Hagel III and John Seely Brown, from Harvard Business School Press (www.HBSPress.org).

If your answer is a tentative `yes', you're not alone. "More than ever, we find ourselves walking a fine line between significant value creation and commensurate value destruction."

The question is not of just profitability, but survival, emphasise the authors, citing a startling statistic: that "the average time that a company spends on the Standard & Poor's 500 list has declined by 80 per cent, from 75 years in the late 1930s to 15 years in 2000."

To stay afloat, see strategy differently, they exhort. Which means, "we must regrind our lenses" and monitor the periphery or the edge. Because "at these edges lie our richest opportunities for value creation."

But what is the `edge'? That's "where one company interfaces or interacts with another economic entity and where it currently generates marginal revenues rather than the core of its profits."

Edge also refers to overlapping boundaries of mature markets, emerging economies, and newer generations of consumers and employees. To gain the sustainable edge, three imperatives that the book outlines are dynamic specialisation, connectivity and coordination, and leveraged capability building.

Dynamic specialisation

The phrase means "the commitment to eliminate resources and activities that no longer differentiate the firm." A common trap that highly diversified companies succumb to is complacency, thinking that "if one element of the business fails or falls short, then other elements will probably prevail, even in very dynamic markets."

Paradoxical, it may appear, but "highly specialised companies can work with a broader range of customers in their area of specialisation" than what a diversified company can, say Hagel and Brown.

An example the book speaks of is specialised software service from Wipro and Infosys; these companies keep developing "insight regarding the fit between specific development methodologies and specific customer environments". The authors are of the view that specialised offshoring service providers in China and India may act as catalyst for the next wave of specialisation.

Connectivity through networks, coupling and fabrics

New forms of connection and coordination demand the use of "process networks, loose coupling, and performance fabrics."

What are these? Process networks go beyond the first tier of business partners and help coordinate activities across multiple tiers of enterprises.

Li & Fung is given as a successful example of `global process network in the apparel industry'. Using a customised supply-chain process, the company draws upon `the most appropriate specialisation among its 7,500 business partners' and defines `the performance requirements for each participant in the supply chain'.

Thus, "Li & Fung may choose a supplier from Korea for a certain grade of yarn for a wool sweater, have the yarn dyed in Thailand, woven in Taiwan, cut in Bangladesh, and assembled in Mexico with a zipper supplied from Japan for delivery to US distribution centres." The site www.idslogistics.com (part of Li & Fung) speaks of `proprietary Trigantic Web portal' that enables business partners to track and trace inventory levels, and monitor `agreed KPI's (Key Performance Indicators)'.

Loose coupling takes `a modular approach to process management' rather than hardwiring the executives. Defined performance levels are to be met by each module at the interfaces connecting it with other modules. "This leaves the module owners relatively free to improvise within their module." Loose doesn't mean lax, remind the authors; "loosely coupled systems operate to very stringent performance requirements".

Performance fabrics ensure `effective alignment within process networks' through `techniques for building shared meaning and trust' and technology tools. These fabrics are aimed at simplifying, strengthening, and amplifying `relationships among relevant stakeholders across enterprises'.

Cisco, for example, invests heavily in learning platforms, realising `the importance of shared meaning', and also recognising that `shared meaning is created incrementally, shaped by immediate business needs'. Trust is enhanced through programmes such as those Nike has "to help its production partners advance more rapidly through clearly defined capability categories."

Essential read for information professionals is a chapter that explains how IT can be `the woof' of the performance fabric, if only companies paid attention to SOA (service oriented architecture) for making software resources more flexibly available, virtualisation for better managing distributed hardware resources, and social software for helping connect the right people at the relevant times through collaboration tools.

Leveraged capability-building

Know that accelerated capability building is "the most powerful source of strategic advantage," and "the only sustainable edge." The catalyst for such `building' is offshoring. On the attention and controversy that offshoring has attracted, the authors' comment is that the long-term impact has been underestimated, and near-term effects hyped.

For instance, many distinctive skills are available in larger numbers outside the US. "China today graduates 3,50,000 engineers per year" compared to the 90,000 engineers that the US engineering schools turn out.

"Most of the leading Indian IT outsourcing firms operate at level 5 — the highest level of expertise of the Capability Maturity Model (CMM), while most internal IT departments in the US will likely operate at level 2 or 3."

And "Waffer in Taiwan has developed the sophisticated thixomoulding process technology to produce magnesium alloy castings for notebook computers with much higher yield rates of 90-95 per cent, in contrast to industry standards of 70-80 per cent."

Leveraged capability building happens when individual companies don't stop with effectively building their own capabilities; they push their performance to new levels faster by forming partnerships with companies having complementary specialisations. To achieve this, companies need to pass the test of `productive friction', stipulates the book.

The concept is related to Gerald Hirshberg's `creative abrasion', one learns. Unlike the `dysfunctional friction' that is the norm in many organisations, productive friction contributes to learning and capability building. "Productive friction is most likely to occur when performance requirements are clear, aggressive, and unconstrained." Corollary has to exist in the form of `action points', where participants act together, and resolve breakdowns.

An example is of Toyota Production System; it freezes the context by even stopping the entire assembly lines to rapidly mobilise "appropriate people to address problems when they arise, rather than trying to recreate the scene of the crime."

In a book that can otherwise add an edge to your big picture, the `epilogue' reads more like an elegy on talent. The authors fondly foresee that educational institutions will be driven towards a pull mindset, and begin preparing talent more effectively. They wish that public policy would promote, rather than hinder, the mobility of talent towards `the most rewarding and challenging opportunities'.

Bet on business to deliver

ANOTHER book on the `sustainability' theme is Stuart L. Hart's Capitalism at the Crossroads, from Wharton School Publishing and Pearson Power (www.pearsoned.co.in). The predicament now is similar to what the world faced in 1914, says the author, painting the spectre of how "between 1914 and 1945, the World War, depression, fascism, and communism almost succeeded in eliminating capitalism from the face of the Earth."

Hart assures us that salvation lies in the hands of `sustainable global enterprise' that adopts, makes profits and raises the quality of life. From that `fork in the road', the book splits into three parts, viz. mapping the terrain, beyond greening, and becoming indigenous.

The author praises Hindustan Lever Ltd (HLL) for its efforts to pioneer new markets among the rural poor. "HLL requires all employees in India to spend six weeks living in villages, actively seeks local consumer insights and preferences as it develops new products, and sources raw materials almost exclusively from local producers." Also praised are: Procter & Gamble's treatment technology called PuR, "which is equivalent to a water treatment plant in an affordable sachet packet"; and KX's new MB (microbiological) water filter that can "quickly transform contaminated water into pure drinking water at less than $10 per family per year".

The sustainable value portfolio that Hart prescribes is for B24B, that is, business to four billion. It has quadrants that address pollution, material consumption, transparency, responsiveness, disruptive technologies, and so on.

Unsustainable development

The final chapter speaks of the Middle East as `perhaps the starkest example of unsustainable development in modern history'. Not so much a poverty of money, but rather a poverty of dignity, Tom Friedman would say. Tens of millions there face record unemployment. "Doctors, lawyers, and other professionals are churned out of universities only to work as day labourers and waiters."

Hart asks, "What if we flooded the region with teachers, health-care providers, social workers, small business developers, and micro-financiers rather than merely soldiers and Western contractors?"

The author advises MNCs to develop major research facilities in China, India, Latin America and Africa, to serve as "jumping-off points for radical transactiveness and the development of native capability". It is not politics that can deliver, but business. With the resources and global reach at its disposal, commerce may be the only institution we can bet on, postulates Hart.

Books that can sustain you through the weekend, may I say?

Economics@TheHindu.co.in

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