LETTERS FROM THE GLOBAL PROVINCE |
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GP 8 February 2006: Boundary Jumpers “Good fences make good neighbors” – Robert Frost, “Mending Wall” A Sense of Property. Once upon a time, fences did help. Aristotle, Locke, and Adam Smith all helped us to think hard about cultivating our own personalities and farming our clearly demarcated patches of land. Prosperity in the Western World was largely built upon the drudge and toil of individuals looking out for themselves. In fact, California’s progress was somewhat impeded by a Spanish land grant system where a hill or a tree might form the ambiguous border between my land and my neighbor’s. When the Anglos took over on the Pacific, their lawyers went to work debating these hazy claims, and, in the end, wound up owning everything, as lawyers are wont to do, taking land in lieu of fees, justly earning their reputation as a cancer on the body politic. Property rights (“what’s mine is mine, and what’s yours is yours”) led to rapid development of these United States—and to an accumulation of wealth the world had never imagined. But we’re a young country, and there are still more chapters to write. Robert Frost is reputed to have been a querulous fellow, but even he understood that we need a greater sense of fellowship than fences allow. Plato and others, from the beginning of Western civilization, have made it pretty clear that somebody needs to take care of the common good. It’s not at all obvious that laissez-faire individualism will keep the party going. It’s time to legalize trespassing. Collaboration. Recently, in Ubiquity, we suggested that the 21st-century ballgame will require unparalleled collaboration between individuals, companies, countries, and all manner of entity if we are to sustain progress and our optimism. We require a closeness that goes beyond Linux and other Open Source initiatives. Not even Wal-Mart, the world’s most important business, can go it alone (though it’s inclined to) in a globally interconnected world where both knowledge and leverage are so widely distributed. It just does not know what’s happening in Mongolia, or Estonia, or Dubai, and yet, the developing world (outside the ten-ton countries) is charging ahead economically at a much faster rate than the developed world. One must go where the money is—that’s why Willie Sutton robbed banks—and, as importantly, one must have antenna out everywhere, since the smarts stirring the globe knows no borders. In our consulting practice, we have become obsessed with all aspects of collaboration. It is for this reason that we pay so much attention to every aspect of the World Wide Web—the Internet. It provides the media for worldwide interchange, moving ideas faster and more comprehensively than any of our institutions and any of our traditional media, which have fallen further and further behind the global-learning curve. To learn what’s up, one must go around all the intermediaries who distort and impede communication. Refinements in the web process (e.g., blogs, instant messaging) each add new capabilities to the collaborative process. For instance, blogs, with all their wordiness and silliness, add a directness, informality, and even creativity to individual communication that break through the shroud that corporations, universities, broadcast networks, etc. have cast over human contact. For the first time, old-line media revenues have been relatively flat even in a rising economy, while Internet advertising and the like have been picking up steam. Incidentally, we’re not the only ones fastened on the Internet: Rupert Murdoch has started to chew on it. Our virtual initiatives have put us in touch with all sorts of new ideas. You will notice that we have added RSS capabilities to the Global Province website. Moreover, the editor of SpiceLines, the spice newsletter on the Global Province, has just opened a SpiceLines blog in order to carry her coals to Newcastle. We have begun to render all manner of strategic Internet advice to companies based on this experimentation and research. At the moment, single individuals with a will to communicate globally, rather than companies, have become the fundamental building blocks of global knowledge and global economics. Christian Sarkar, who follows the doings of the demi-gurus of business for a living, has noted that the smartest fellows have left large companies and gone on their own in order to better distribute and gather wisdom. Ever on the ascent for some 600 years, the corporation as we know it is about to get bumped out of the saddle. Interestingly, The Economist (January 21-27, 2006), in “The New Organisation,” postulates that a new type of corporation is on the way that may catch up with the imperatives of the knowledge economy. We doubt it. The corporation places too high a premium on walls of all sorts, including the vaunted “barriers to competition.” We see no sign of a new paradigm in the larger business organizations cited by that magazine, though bits and pieces of the right thing are happening in smaller companies that are not in the limelight. Global Strategy. Post World War II, American corporations did not have to be terribly bright. They did not have serious competitors, they were insulated from world markets, and they had an abundance of growing markets here and abroad in which they could sell their wares. None of this is true anymore. But, for such a long while, all they had to do was to manage their costs fairly well and do a lot of me-too things in the marketing sphere. In fact, consulting firms after the war largely dished out advice on cutting costs. The most intriguing consultant was not McKinsey, but Boston Consulting Group, which sold companies on the experience curve with all of its cost implications. Marketing, in fact, withered on the vine—slowly, unnoticed, but relentlessly. We think companies can only get smarter by moving towards the collaborative model we discussed above. Now they are only wired to the world around them by a few primitive cables. The central strategic imperative is to foster a more complex circuitry that has a more subtle relationship with the global environment. Neurologists estimate that the human brain has something like a quadrillion synapses, which explains in short why it is such a marvel. Only something more organic and complex, akin to this, will allow companies to have sensitive feelers that can capture what is happening in our Barnum-and-Bailey world. This new creature will hardly bear much resemblance to the corporation of today. Now the strategic question is how to grow in markets that often have no growth left in them. Band-aid CEOs are making large acquisitions, growing through consolidation, although we are not certain this is a sustainable strategy. Instead, the bright guys are trying to get their products right and looking for new markets. In other words, they’re trying to revive atrophied skills such as building it right and selling it better. But, like Rip Van Winkle, they’re awakening after a deep sleep that has lasted decades and are encountering a strange, alien world where it’s a trial to put one foot in front of another. All of a sudden they are experiencing the shock of going global. Our several activities in China grow out of this need for companies to redefine themselves. One of our colleagues has just started a global sourcing company which intends to better connect auto parts makers in China with distributors and automotive companies in the United States. The trick here is for the process not to become Wal-Marted. Wal-Mart itself has been a relentless buyer of Chinese products, and probably its most significant buying office is right in Shenzen. But as we have said elsewhere, Wal-Mart pretty much drives down quality in order to get the lowest, lowest price. The aim for a global sourcer in China or elsewhere should be to buy the right mix of price and quality—with a view to enhancing the end product. Can all the parts of the auto supply chain become truly collaborative with a large value-adding, strategic view of what the outcome should be for all parties? The Chinese auto parts industry, full of entrepreneurial sorts, has the right ingredients for collaboration: quality can become part of the mix. The giant Wanxiang and a host of smaller peers are more interesting than the Chinese auto makers. It is led by “Mr. Lu Guanqiu, a Chinese farmer's son,” who built “his enterprise from a small bicycle repair shop.” These scrappy companies are one ingredient in the mix of initiatives that can rescue sorely troubled auto companies in the U.S. whose problems we discussed in “Autos: The Thrill is Gone.” In an ideal world, there would be very few acquisitions—many more collaborative alliances. We have even argued that acquisitions and mergers have become value-subtracting, only providing wealth for the M& A crowd on Wall Street that pumps them up. But in China as well we are helping one merchant banker that is finding strategic acquisitions for large multinationals. The feeling is that a Western company cannot get seated quickly enough in the fast-developing, fast-integrating Chinese economy without some quick buys. China is expanding 8 or 9% a year, and some multinationals are going to miss the train if they do not move fast. A Call for Boldness. Of course, you do not have to go to China for everything. There are still fertile growth markets in the U.S: health, some financial services, and infrastructure offer a wealth of opportunity. The oddity here is that many companies in these strong sectors have been affected by the bruised, risk averse psyches that populate other diseased industries. Here, our consulting challenge has been to push our clientele to think long, big, and deep enough with the goal of getting beyond the 20-m.p.h. personalities in shrinking businesses. Globally Inefficient Investment. Gradually we have been pushing into the world of investments on a variety of fronts. We advise a few money managers. We are helping some private equity players buy and restage $100 million plus growth companies. On the Global Province, you can find our Investment Outlook section where we try to look at where the nation and where little investors should try to put their money. Despite the mystical, virtually religious zeal with which theorists hovering in Chicago have flaunted their belief in efficient markets, it’s pretty clear that money does not go where it should— Iraq has proven that beyond a doubt—and that the best available information about investments does not make its way through the global financial apparatus. The Rothschilds knew that, and that’s why they used pigeons to transmit insider data: things are not that much different today. Sarbanes-Oxley, and other government initiatives to remedy the imperfections of the financial marketplace, have only compounded the problem. In these times, where tomorrow is less and less like yesterday, we suspect that financial markets and capital allocation are increasingly inefficient. The world over, financial markets are sending us signals that are causing us to put our bucks in the wrong buckets. The old adage rings ever more true: Don’t believe everything you read—or hear. So we are very committed to the idea of how inefficient financial markets are. Again, the best way we know to overcome this is through an informal, collaborative information process which will dispel the myths and fog plaguing our financial markets. In brief, we say at this point that efficient investors should be placing many less bets in the U.S., since so many of our industries have hit a stone wall (oh, those troublesome walls that Robert Frost talked about). But one would be putting a dollar or two into infrastructure markets, something that General Electric has found appealing. By and large, the problem here is to look beyond the domestic, consumer-driven companies so avidly recommended by your broker. The opportunity is huge, because the herd is galloping in the wrong direction. By the way, we find that Peter Bernstein, the wise man of Wall Street and prolific author, usually writes the right book at the right time. In 1998, he wrote Against the Gods, the story of risk: that’s when we should have most been paying attention to risk management. But in 2005, he came out with Wedding of the Waters, a history of the Erie Canal. This canal transformed our nation in the 19th century, readying our economy for takeoff and preparing us to command the heights throughout the world. It made New York City dominant in the country, a position it has not completely lost today. Infrastructure that connected us to the globe was the pre-condition of America’s greatness. Right now the safest thing is to find the right big infrastructure risks to underwrite. Boundary Jumpers. Business today is in a race between the consolidators and the boundary jumpers. If you’re an Exxon, you become the biggest machine in the oil business, hunker down, drain the barrel for profits, eschew risk, and tell alternate energy to go to the devil. Over-focused on returns, you abdicate your responsibilities to the nation, not developing the additional refining capacity it needs. Feelings of security are secured by becoming the biggest tyrannosaurus around, even though we know the barrel will run dry—and that we will be in a bruising battle with the Chinese and the Indians to secure new oil sources. BP, which is much less inclined to tuck its head in the sand, is probably a more reassuring long-term bet. But we think the boundary jumpers will win. A company such as Skype, the brainstorm of a Swede and a Dane, pops up in Estonia, transforms internet telephoning, and grows like topsy turvy, because the world is not too big for it and because it chooses partners like E-Bay that can transform its business. The boundary jumpers will own fewer assets and depend for their livings on a host of conspirators across the globe. Because such agile companies interest us so much, we have chosen to focus our firm on the arts of collaboration and the other stratagems that will permit the nimble to leap over walls. Souls on Ice and on Fire. Eldredge Cleaver, author of Soul on Ice and Soul on Fire, was clearly a troubled man. Revolutionary and jailbird, he did prison time, dope, and everything else. A member of the Black Panthers, he fell out with his comrades, who eventually were content to work on incremental improvements in the Black condition in America. In time the Panthers disintegrated, pummeled by law enforcement and bad publicity, riven by internal arguments. Cleaver, to the end, stuck to revolution and went his own, very separate way. From his lips came, “You’re either part of the solution or part of the problem.” While his call for revolution and violence was irrelevant then and irrelevant now, his war cry takes on quite a different meaning today. One can hold to a world of walls and boundaries as do the consolidators, or work on collaboration and shared interests. It’s not entirely clear that there’s a middle ground between these two visions of the world. In our own view, our self interest lies in nakedly pursuing the common interest. In economic terms, one could say that we can no longer afford the friction costs that arise from unmitigated individualism, so we need a commons where everybody can graze. As Frost said, “Something there is that doesn’t love a wall, / That wants it down!” P.S. If we were to recommend a read for tired businesspersons or wet-behind-the-ears MBAs, it would be R. Buckminster Fuller’s Operating Manual for Spaceship Earth. That wonderful futurist and spinner of geodesic domes wrote this short, accessible book that says you have to be an intellectual pirate to win globally. That’s about right. The shortest distance between two points is not on the highways, sea lanes, or air passages plotted by our bureaucrats, but on the pathways that never made it onto the maps. P.P.S. It’s very, very hard for the Western mind to operate globally. We have always had an eye for the particular, rather than the whole—both a strength and a weakness. The East has tended to see the whole. For more on this, see F.S.C. Northrop’s Meeting of East and West. Right now our near-sighted compulsions are hamstringing us in business and in geopolitics. P.P.P.S. A 1944 Bing Crosby song, “Don’t Fence Me In,” from sophisticated Cole Porter, should become our mantra: I want to ride to the ridge
where the west commences |
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