Last week, on Thursday night September 16, 2010, I had the good fortune of speaking to the Society for Information Management’s (SIM’s) Boston chapter about the implications of social media.  You can get the slides here.

The core of the talk was the idea that we are entering a third wave of capitalism, and further that two of the most central tenets of capitalism are the collective absorption of risk and the ability to self organize.  The first wave was born with the creation of the “shared stock” company in which the owners could spread the risk to create new ventures too risky for any individual or the crown.  John Jacob Astor, the famous fur and real estate magnate came to the United States shortly after the revolutionary war and began a number of firms, including the American Fur Company, which helped to make Astor America’s wealthiest man when he passed away.  His fortune today if compared to the nation’s GDP, is calculated by Forbes to be worth $110 billion — more than Bill Gates and Warren Buffet combined.  Astor, to me, is a great example of first wave capitalism.  Collective risk absorption allowed Astor to grow.

Second wave capitalism rose on the back of the twin innovations of the railroad and the telegraph. Historian Alfred Chandler carefully documented the evolution of the large, complex and modern corporation — arising from the Scale and Scope (which Chandler’s book of that name documents so well) of commerce enabled by the ability to move all manner of goods across the entire nation (or across Europe) in a very short time (3 days for the US), and with great control over the process of shipment through the use of the telegraph.  The capital needed to build the railroads and the telegraphy system created the demand that helped to launch the modern capital markets we still use today.  William Crapo Durant, a man with a most unfortunate middle name, was the father of General Motors.  He built the company and lost due to financial pressures.  Then, working with the upstart Louis Chevrolet, Durant managed to take over GM again, only to lose it again due to his over aggressive financing and expansion efforts.  To me, GM, founded by this courageous entrepreneur, and then well managed through the middle of the 1900′s was a shining example, of Second Wave capitalism — growing to a size and complexity never seen by the world before. There were many other examples too: DuPont, Swift, Sears, AT&T, among others.  GM, and these other firms, could never have reached the scale and efficiency they achieved without collective absorption of risk, and massive self organization of supply, demand, and management.

In this Third Wave of Capitalism, which I think we are beginning to experience now, we have the commercial miracle of the internet.  The internet give us standard parts for knowledge work, communication, and data transport.  Like the telegraph and railroads before it, it provides an unprecedented base upon which to build business models.  An excellent example is the founding of YouTube by Chad Hurley, Steve Chen & Jawed Karim, all alums of PayPal.  The company was founded as a venture backed start up in November 2005, and was sold to Google in November 2006 for $1.65 billion.

I argued that the reason that it was possible to create $1.65 billion in value in only a year was that YouTube is riding atop a standard, global infrastructure that enables massive self organization — and end user participation at a new level.  Like the waves before it, this infrastructure creates a space for new business models like Google, Twitter, Foursquare and others.

The great news for all of us is that every time there is a new platform for collective absorption of risk, and self organization of resources and drive, there is a huge explosion in the creation of wealth and new products and services for consumers.  I think we are just at the start of such a revolution.

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I’m coming to believe every good is a convenience good.  A recent New York Times article reported that Nordstrom has integrated their in-store inventory with their online supply, meaning that anyone can get access to the entire inventory from any “location” — a physical store or online.  They also report that Nordstrom’s management believes that this “innovation” has helped change their same store sales from a “negative growth” (don’t you love that term!) of 11.9% to a positive growth of 9%.

The brilliance of this strategy is that it maximizes the most precious thing in any business — the yield on a customer that wants to buy something, now!  The famous maxim by Peter Drucker was, “The purpose of business is to create and serve a customer.”  So many businesses have become so operationally complex — especially in retail, that there are many barriers for a customer who wants to spend money.  Nordstrom, fortunately, was willing to spend the two years necessary to integrate all their inventory into one information pool — and thereby allows not only better customer service, but fewer mark downs and sale items.

Rightfully, the article points out how few companies have pulled this off.  But I will say I saw a similar result years ago.  Back in 1998-1999 I was working with W.W. Grainger the $7B industrial parts distributor, and then CEO Dick Keyser.  (By the way, Grainger’s stock price has tripled over the past decade while paying a regular dividend.)  Dick wanted to completely integrate the physical and the informational.  He was early in the market with Grainger.com, and was willing to make the significant investment to integrate all his inventory across retail stores, over 15 distribution plants, across a magnificently complex product line.  Grainger carries over 250,000 different products!  But Dick wanted any of their thousands of customer service or sales people to be able to check the entire inventory of the company and to be able to commit the actual unit — maybe it was the last water cooler available to replace a broken one in the local high school gym.  Not only does their system allow for complete visibility and commitment of the inventory of the entire company, but it even allows the customer to say if they want it shipped, if they will pick it up, or if they want it transferred to a closer store to allow for pick up.  Now that’s inventory control.

Dick was very clear on why he wanted to do this: Grainger’s core value proposition is convenience, and if they did not have availability the complexity of their business would dampen their economics.  But, if they could break the back of that complexity — by having one inventory then they could deliver better service and capture differentiated demand that was willing to pay a premium for service.

I think this lesson is generalizable.  All retail companies, and to an increasing extent business to business companies must have complete availability of all their products and services wherever, however, and whenever the customer comes to them.  Demand is a terrible thing to waste.

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Every once in a while you see something which is such a fresh solution to a problem you just say ahhhh.  Check out this skytrain/bus idea about how to float about the traffic in China and create efficient transport.

It got me thinking as to what makes for a disruptive thought:

1. A solution which transforms a constraint into a benefit.  In the sky-train/bus example, the roadway becomes the rail-bed for the elevated sky-train.

2. Disruptive thinking often creates a radically new relationship between resources.  So when you think about the folks who are growing algae from human waste to turn it into bio diesel it is a new relationship among inputs and outputs.

3. Disruptive thinking often radically changes the scale of an innovation.  For example, when Christo the artist decided to wrap entire buildings or create valley curtain, he was thinking of art on a grand scale — and its very scale changed the nature of the innovation.  See the photo above.

4. Disruptive thinking sometimes comes simply from radically lower cost at higher volume.  Narayana Hrudayalaya hospital in Bangalore is the largest heart surgery hospital in the world — doing over 6,000 operations a year, with half on children, at a small fraction of the cost of any other location the world.  Check out the BBC report on this spectacular organization.

5. Disruptive thinking sometimes unearths a desire or a market that no-one thought was there.  Who knew people that people would be so interested in talking with each other in a social network.  Facebook’s 500,000,000 members were unforeseen by anyone I know and only by the few who believed its potential power.

Is there a disruptive way to look at a big issue or opportunity you face?

In our recent Diamond Digital IQ study, we found that only 3% of healthcare companies were focused on innovation as their primary strategic emphasis. You can empathize that 2009 was a year where many participants in the healthcare cluster were just trying to survive, but, in an industry where costs are rising, care is becoming more complex, and funding sources are in flux, we need more than only 3 in 100 firms focused on innovation.  See the figure below.

In this short post, I want to suggest a small number of innovations which could be enabled by iPads and other new mobile technology.

Let’s reinvent patient education and use all that waiting time! There are already over 700 applications for the iPad. Many of them concern diet, disease management, exercise, nutrition, stress reduction and even the Army Ranger handbook. Instead of reading those old magazines, or boring generic brochures, you could actually learn something while you are waiting for your doctor.

Bring the relevant information to the moment of use. Often doctors and nurses need or want information that is a few feet or a few floors away from where the treatment is being practiced — and they cannot afford the time to track it down. The provision of medical care is a very complex “manufacturing process”. The specialty talent — doctors & nurses — have to have their unique equipment, from blood vials to ultrasound machines — nearby, and all treatments, opinions, and equipment use need to be logged into the patient’s record. Furthermore, this body of information needs to be passed from shift to shift — flawlessly. Because the iPad is high resolution, easy to use, and chic (not geek), it has a chance of being the tablet device that doctors, nurses and patients can use to help bring the relevant information to the point of need. If the information can be digital first, it has more chance of being well recorded and shared.

Tag everything. How many times have you been in a doctor’s office or hospital when they cannot find the relevant person, equipment or information. A friend of mine put sensors into a community hospital — tagging everything in the operating room, pre-op and post-op. This meant that the scheduling team could see where all the doctors, nurses, devices and other assets were — in real time. This ability to act more like a modern air traffic controller increased the throughput of the organization’s operating suites by 25%, simply by better coordination.

Use video to tell the story. Unfortunately my children have had a number of operations, and I have listened to many surgeons draw their procedures on the whiteboard — with their minimal drawing skills, and explain the procedure to come.  I would have much preferred if I could have watched a simple video, with some illustrations, to show what they intended to do.  With the easy video capture on today’s technology, cheap and extremely capable editing software, and graduate students who could make the videos — it seems to me time to create a better library of visual content.  Check out the high definition cardio vascular system iPad application.  It gives mind blowing detail of how your heart and vascular systems work.  Applications like these are just the beginning.

Create a social space for the coordination of care. In the care of an individual there are many, many people who usually need to understand status, take responsibility for part of the care, and report results.  Sharing status of results, plans and status of the patient — to those authorized to look — could save a lot of headache and heartache.  Why can’t my relative’s status be tweeted to me?

Follow the patient home.  Non-compliance to drugs and treatments after the hospital visit are a huge issue.  The majority of patients take their medicines incorrectly, and many people are not sure of their post-operative, or post-visit instructions.  Soon touchable, portable devices will be cheap enough to give them a device as they leave so that the hospital staff can keep the communication channel open and monitor their compliance to advice, saving lives, time and money.

There are many other potential applications that could help healthcare bend their cost curve.  Now is the time to start innovating, and mobile has a chance to reinvent the interaction of the doctor, care givers, family and patient.

Other useful links:

• Diamond’s 2010 Digital IQ Study Interactive Site: test your industry’s Digital IQ!
• iPad: The Remote Control for Everything?
• iPad in the Enterprise: Will CIOs Use It To Innovate for Customers?
• Sales Reinvention: Why the iPad is a person to person innovation.
• How the iPad is Like a Tesla Roadster

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Every time there is an innovation in risk absorption the economy flourishes. The invention of the shared stock company by the Dutch and the English allowed merchants to take advantage of risks and ventures that the crown would never have had the stomach or the pocketbook to undertake. The creation of burial insurance — thankfully called life insurance later, created a new way to allow people who were working in the newly industrialized cities of Europe and the United States to help to defray the risk that their families had if they died unexpectedly. The creation of mortgage-backed securities, done correctly, is also a great boon to risk absorption because it is cheaper for mortgages to be traded in large pools than individually as it lowers the cost of financing.

Early in 2009, I predicted that peer to peer lending would continue to be an important trend in the economy as part of the “important ideas” published by Harvard Business Review.  I’m happy to report that Lending Club continues to grow at 10-15% per month.  Lending Club allows peer to peer lending and often they fund borrowers for less cost and faster approval than traditional lenders.

They still need to prove that they can become a major force in the lending market, but I believe that firms like Lending Club can help to define a new paradigm where the community bank of old can be more scalable and efficient.  Given how tight the credit market is today, a more collective approach to lending might help to continue to expand useful credit.  If we get a shock to economy with higher interest rates, some time in the future, this peer to peer infrastructure might even be more important.

Today’s New York Times article joins new stories about Zynga (formally Zynga Game Network), the maker of FarmVille, MafiaWars and other popular games on Facebook.  Mark Pincus, the 44 year old founder is estimated to be Silicon Valley’s newest paper billionaire.  Not only is his company profitable but it also sees over 200 million people a day on their Farmville game alone.

How do they make money to the tune of $835 million expected this year? Their revenue stream, as reported by the Times, is comprised largely of people buying digital currency for seed, animals, equipment, etc.  Like Second Life before it, marketspace communities are willing to spend real money to create activities, status, and function within their virtual world.

It only makes sense that as people spend more and more of their work and leisure time “within” a digital environment that there is a concomitant rise in the nature of social interaction.  Perhaps Facebook, Twitter, Zynga are all “yin” to balance out the “yang” of work.  Put another way, if we spend so much time interacting in functional ways with email, spreadsheets, and PowerPoint decks (which are often more mind-numbing than being forced to listen to C-Span), as humans we find a way to inject something fun, social, and diverse in our days of structured work.

It is interesting to me that the biggest consumer killer apps of the past five years have not been about productivity, they have been facilitating the more “humanizing” aspects of the web: fun, chatter, and games.  I wonder how much more the pendulum will swing toward these social applications before productivity comes to the fore again.  (By this, I’m not saying that Twitter and Facebook are completely unproductive, but I am saying they are less instrumental toward traditional cognitive work than a spreadsheet.)

It begs the question, how social is your personal marketspace — or digitally, are you all work and no fun?

A friend of mine recently asked me: What do you think are the biggest barriers to innovation?  If you look at the literature on innovation many folks cite insufficient support from the CEO, inadequate funding, the pressure of quarterly earning, a culture of following, and fear of risk.  I expect that these explanations are valid, but given how complex it is to truly innovate, I wanted to offer up a somewhat different list — based on experiences in helping companies innovate, and drawing from some previous posts I’ve done.

Benchmarking

In my opinion, benchmarking may be the single most detrimental method of analysis when it comes to innovative thinking.  At its core, benchmarking is about comparing yourself to what is — not what could be.  You don’t get Crest Whitestrips — because they did not exist before P&G made them happen.  Of course, any market analysis should include an understanding of current competitive offers but to focus on comparing your product or service to what other people are doing frames the solutions within an already known product — which by definition is likely to constrain solutions to me-too status.

Lack of Willingness to Cruise the Edges:

The future is already here, it’s just not evenly distributed, a quote attributed to cyber writer William Gibson.  If you look at extreme tasks — you can usually find an interesting set of solutions which might give you some idea of what might become mainstream in time.  For example, Dr. Robert Ballard the explorer best known for discovering the Titanic created the Inner Space Center in Rhode Island, which has huge, high definition screens that allow the scientist to follow the progress of two ocean going research ships in real time as they make discoveries around the world.  One ship, the Okeanus has two robot vehicles they can deploy for undersea exploration, and the newer one, the Nautilus has four.  As you may remember, Ballard explored the Titanic with robots.

Ballard says, “Why should I move my body to a research site, when I can just move my spirit?”  His lab, and the ships are connected to internet 2, which has bandwidth 10,000 times as fast as the retail internet.   This allows them to share a rich, high fidelity information space for collaboration and problem solving.  Looking at a place like this “at the edge” you can see a lot about how cognitive work could be redesigned and what the future might hold.  (My friend John Hagel has also recommended this approach — see his EdgePerspectives blog.)

This process of looking for extreme tasks is the antithesis of benchmarking, which hovers around the center of today’s capabilities.

Lack of Desire to Ride Exponential Trends:

We know now that the cost of human gene sequencing is decreasing faster than Moore’s Law.  So what will this exponential change in costs mean to everything from crime prosecution to identity management?  Which organizations, and functions will change with these massively cheaper and more capable, biologic screens?  This is just one technology that is moving at an exponential pace.  Ray Kurzweil’s book The Singularity is Near, documents many such trends — and as Ray notes, it is possible to “see the future” if you watch for the confluence of exponential trends in technology.

This process of examining the exponential trends is not anything like traditional technology forecasting which tends to look at straight line projections of improvement — not coherent disruption due to multiple exponential forces converging.

Too Cheap to Buy Your Way Into the Future:

Alan Kay, the man who invented the overlapping windows interface I’m using now and almost every modern computer uses said, “Any firm can buy its way into the future 5, 10, or more years.  They just need to spend the money, and the military does it all the time.”

He is right that for many technologies which are on the exponentially improving pace that Kurzweil talks about can often be bought by large companies as a way to experiment now for a future to come.  The apocryphal story of Steve Jobs inventing the iPad first, and spinning off the iPhone was due to the fact that he was designing for a world with cheap, high quality screens.  He was early for the iPad, so he first launched the iPhone.  My belief is that if Jobs  had not been trying to buy his way into the future, he never would have seen the possibilities.  Today, firms could design work for when there is very cheap bandwidth.  For example, they could install some of the most advanced video conferencing throughout a facility to see what it will be like to have an always on, high definition, real and virtual workspace.  From what I’ve seen in Ballard’s lab, it will be different and more productive.  Now is the time to buy your way into the future to see it.

This is not the same as building prototypes.  This notion of buying your way into the future is to design real work and real actions but with technology that costs too much today, but will be cheap tomorrow.  You want to live in the future, not just have a window into a mock up of it.

Lack of Contract Innovation:

If there is a new product or service locked within a firm, there is often no way the inventor, or innovation team can force the organization to make a decision.  Back in 1992 Ray Ozzie (the current chief software architect at Microsoft) started Iris, a company funded by Lotus — to create Lotus Notes.  If Lotus stopped the funding, Ozzie and his team had struck a deal in which Iris owned the intellectual capital, and therefore could take their invention to anyone — including Microsoft.  This gave Iris a way to make sure that Lotus would not kill them through lack of action.  Many innovations languish because the innovator has no ability to force a decision from the parent company.

Underestimating the Sales Cycle:

It always takes longer than you think to sell something new.  This delay in sales often makes companies cut and run when they might have had a winner if they could only have seen the early revenue coming in.  It takes time to help people see the new value.  For example, Steve Jobs funded Pixar for 10 years before he brought it public.

Lack of Slack:

Often, the very best people have no time to innovate.  Google, brilliantly, asks people to take 20% of their time and use it to create new things.  This is forced organizational slack.  Even if people find the time by working on the weekends, there is an expectation that any Googler can step back from his or her job and find the time to innovate.  That idea, and challenge are so cool it fosters creativity.

What do you think?

Google’s recently reported $100-200 million investment in the company Zynga, the very popular online game company, is their latest attempt to finally get their social media strategy off the ground and take on Facebook.

Google is vitally interested in social media for at least two fundamental reasons.  First, on Google you are largely anonymous, but on Facebook you are a real person and they know much more about you than Google.  Second, the “social graph”, the name given to those people you connect with is a vital source of information about people, their preferences, even their role in society.  In a world dominated by information networks, as ours is, the social graph is the most important map of the terrain.

When I was a doctoral student I performed extensive analysis of a number of companies’ social graphs and from that information I could tell status, power, interaction, social isolates, and the like.  It is VERY powerful data.  Today, with the possible exception of Brasil where Google’s Orkut social media site is popular, Google has very little access to the social graph data — only that which they can derive from GMail.

Given the fact that Zynga is one of the core reasons people come to Facebook — with over half the users of Facebook using one or more of Farmville or Mafia Wars — two of the more popular titles on Facebook, this investment by Google may allow them to finally make it into the social media space.

If Google is successful, they will have the ability to offer customers not only search, but you will be able to look at what your friends “like” or not.  You can search by social graph, and given how important word of mouth is to companies, this new capability is likely to draw significant volume of traffic, and to give advertisers valuable information about people and their groups.

It is ironic that one of the most “analytic” companies in the world, who have repeatedly missed the mark when it comes to social media, may back-door their way into a viable competitive offering to Facebook.  Go figure!

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Telstar I: Courtesy of Wikipedia

On July 10, 1962, Telstar I was launched, the first communications satellite to transmit live television across the Atlantic.  The term Global Village was coined at about the same time by Marshall McLuhan in his books The Gutenberg Galaxy: The Making of Typographic Man (1962) and Understanding Media (1964).  McLuhan was referring to the effect of radio in the 1920s which brought people together faster, and more intimately.

Telstar ushered in a new, more visual global village and the power and frequency of this visual world continues to grow.  As I’ve written about before, this current generation of Americans age 8-18 is in and around media about 10 hours and 45 minutes a day — of which about 2/3rds is visual, moving images (aka video).

Fittingly, YouTube announced yesterday that they are creating a “partner grant” program in which they will advance creators of content a sum of their future revenue share.  Put another way, YouTube is creating a huge crowdsourced production studio.  It is interesting to note that 48 years ago the true breakthrough was in creating the technology to enable video to traverse one ocean.  Today, we have a standard global infrastructure of the internet, and the innovations are in how the materials are gathered and shared (e.g. YouTube) and how they are financed (e.g. their grant program).

What this means is that YouTube is using its market position to help lower the risk of innovation, and it’s a vehicle to create even more choice and competition.  I think all media companies who have an audience need to learn to do the same — or all the best young talent may find their way to YouTube and stay there.  As someone who used to read hundreds and hundreds of exams when I was a professor, I can personally attest to the fact that few people (less than 1%) tell a story well.  In this global, visual village, YouTube is doing the right thing to unlock the story-telling talent through grants, because that is the source of lasting audience creation and finding those few geniuses who can really spin a yarn.

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This post is co-author Joseph Calandro, Jr., author of Applied Value Investing (NY: McGraw-Hill, 2009).

One of the most important and overlooked innovations in business are the innovations in internal controls and measurement.  The duPont company famously invented their duPont formula which helped their executives to understand exactly what was driving financial performance in their business; which divisions were making good margins; which consuming too much capital.

We think that the story of the 1980s-2008 was a story of focus on the external financial innovations — which were significant both in their market impact, and on their forms of corporate governance.  For example,  in the 1960s and 1970s many conglomerates formed to give shareholders a promise of diversification.  But with the three innovations of the efficient market hypothesis, mutual funds, and corporate commercial paper, many investors asked themselves, why should they own  a holding company when you can efficiently hold each of the “divisions” directly?  Financial innovation and theory had a direct impact on corporate governance and organization form.   And despite the havoc that complex financial instruments have wreaked on our worldwide financial system, few observers would claim that they are all bad.  Remember that in recent years Southwest Airlines helped to create tremendous value for their shareholders by effectively hedging fuel costs, just to name one company.

Given increased volatility and continued financial uncertainty, our question is what “internal” message should firms take from the recent financial innovations and their devastating impact on many banks and markets.  We believe that firms need to  reexamine their risk models and to inspect their evaluation and feedback loops those models depend upon.  Put another way, you want to make sure that there are no simplifying assumptions that created so much havoc for mortgage-backed securities.  You want to make sure your control systems accurately reflect the current risk.  More specifically, we think that in such a volatile market, senior executives should look anew at their corporate hurdle rate, and think about “de-averaging” that rate.  We have performed extensive analyses of financial services companies and found that they have an overly simple hurdle rate.  This means that when a management team assesses a portfolio of projects, they are not comparing apples to apples.  When a new, de-averaged hurdle rate is applied, the senior team usually comes to new operating decisions because they see the real risk/return of their business in the current environment.

In addition to the new differentiated hurdle rate, such an analysis can also lead to adjustments in capital structure, in which the financial team, with the senior executive, can begin to match forms of capital to the nature of the operational and market risk.   For example, mature cash generating initiatives can be matched to debt while newer more entrepreneurial initiatives would be matched to equity. In short, matching of the balance sheet to the nature of the business risk help to make risk management tangible.  Of course there won’t always be a one to one risk match, but such an exercise can show the team just how close their capital structure reflects their operating reality.  Together,  “de-averaging”  and funding matching, facilitate a much more strategic view of the “cost of capital,” especially when that information is aligned with performance management.

The skill set needed to implement this kind of approach involves elements of science (or knowledge of the theories underlying conventional business practice), art (experiential-based learning and insights), and behaviorial understanding (knowing how to operate effectively in external and internal environments). Such a skill set is relatively rare; however, those who possess it should be able to make the most out of their current returns to capital and be better prepared to weather markets in times of calm and turbulence.

We don’t expect the markets to calm down any time soon, so now is the time to build up your organizations ability to operate in more informed way.

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