I believe that the reason Oliver Williamson, whose work builds on the seminal work of Ronald Coase on transaction costs and Elinor Ostrom, who worries about the private coordination of the sharing of common resources, is a wonderful recognition that in our increasingly networked economy, the Nobel Prize Committee recognizes the importance of the problem of coordination and sharing common resources.  I would suggest it is becoming as important as productivity.

If we look broadly at productivity, the economy continues to do well on this dimension with some estimating the the future holds continued productivity growth of about 2%, each year on average (albeit with significant volatility in that statistic).  Through the wonders of compounding the average American today is over eighty times as wealthy as the average in the founding years of our republic.  Not bad.  Productivity will continue to be important, but in a world where three billion people have many goods and services and there is a surfeit of supply, and three billion have practically nothing — it seems coordination may need a bit more attention.  The same is true within companies — often things can improve a lot by changing the nature of internal coordination.

Many years ago, my friends Chunka Mui, and Larry Downes wrote a book called Unleashing the Killer App in which they noted that the three “laws” of Moore’s Law — which states that integrated circuit costs go down by 50% every 18 months, Metcalf’s Law, which stated the the value of a network increases by the square of the number of people attached to it, and Coase’s Law which notes the vital importance of transaction costs when looking at what should be inside or outside a firm.  Larry and Chunka predicted that these three laws reshape commerce and enable radical opportunites for new business strategy.  The past ten years has proved them broadly right.

We have seen a number of Killer Apps based on changing transaction costs.  Craig’s List has evicerated the newspaper business due to much lower transaction costs; the NYSE is losing their volume due to dark pools of liquidity where traders can do it as cheap, and without the scrutiny of regulators.  In trading, technology has simultaneously enabled lower costs of transaction, and more regulatory oversight — so its not suprsing that volume is leaking out where costs can stay low and oversight is less.  The entire world of microfinance, which includes the wonderful work of Muhammed Yunus who won the Nobel Peace Prize in 2006, is based on the decreasing costs of transacting the loan (in more precise Coasian terms, contracting and policing are less costly), is much, much less, thus enabling the creation of smaller scale financing.

Why does Crowdsourcing exist?  Changing transaction costs.  Why does the Apple iStore exist?  Changing transaction costs.  Why does LinkedIn have better information on our employees that our internal databases?  Changing transaction costs.

So far I’ve given short shrift to Ostrom’s contribution.  To be fair, I’m just getting to know her work, but the idea that private coordination of common goods is a very important notion.  There are glaring examples of lack of ability for private enterprise to oversee a common resource — like the Mississippi River’s lack of governing body which leads to many crazy things including a dead zone at its mouth which some say is the size of Florida — in which nothing but the algae which thrive on the absurd amount of nitrates which we pour into the might river from our farmlands, can live because those algae eat all the oxygen.  But there are wonderful examples of things like the Internet, which are in quasi governmental hands which have a fantastic track record of sharing and innovation.  See also, Wikipedia.

I think that as more and more things are shared resources — whether it is the books in the public domain that Google is trying to scan, or water, or the personal information stored by a company like Facebook, the challenges of sharing huge, common, assets, will become an even more central issue in the networked, knowledge-based economy.  Consequently, the importance of Ostrom’s work, and work like it, will increase.

Inside companies, changing transaction costs have always meant that we need to look at what is owned and what is rented.  There are estimates that the global outsourcing and temporary work market will continue to grow at 5-15% depending on the facet of temporary work being considered.  In a less traditional vein, companies need to think about how they can link into the rivers of transactions, external data and social venues that have emerged.  It is not just about what is “inside” and what is “outside”, but it is about what is networked into your organization.  For example, when you do market research can you easily link in the expert networks on LinkedIn?  Can you aggregate all the relevant inforamation about a company that is on the social media, blogosphere, and traditional media so you can be ready for the sales call with the most relevant and up to date profile on the company?  Can you tap into the global market for talent at a individual, group and firm level?  If the answer to any of these questions is no, you probably are overly focused on productivity — and not enough on coordination, for our networked world.

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Intuit just bought Mint.com for $170,000,000.  Mint is a simple, web and phone based tool with a great design interface that helps people manage their finances in an integrated way across all their credit cards and asset accounts — helping individuals get on top of their financial life.  The New York Times reports they have 1.5 million users, and tracked over $200,000,000,000 in spending meaning that Intuit is paying over $100 per user!

Why did the company that made its mark on simple user interface (its very name Intuit is a riff on “intuitive”) have to buy Mint? Why couldn’t they have built it themselves?  My colleague Paul D’Alessandro and I have been pondering that question and we think it is because it is very hard for a complex organization to build something simple.  It is the natural tendency of all firms, product lines, governments and even households to build up too much complexity that adds little value.  As my friend Jim Rogers noted, “Organizations are like households — they tend to fill the attic and basement with too much stuff, and it takes discipline to remove it.”  From a human standpoint, it is easier for executives to say “yes” to a new product or feature than to say “no”, and it takes even more work to kill an existing service or offering.  Even Scott Cook, the legendary CEO of Intuit could not pull it off, so many firms have this problem.  Earlier this year, Rosabeth Moss Kanter also noted: Simplicity the New Big Thing.

So what?  Well, the customer suffers.  More importantly, we know from our work in Behavioral Economics, that too much clutter, and choice freezes customer decision-making.  Too many offers are not enticing, instead they cause the customer to be overwhelmed and then do nothing at all.  At a number of our clients we have simplified decision-making processes — not just the choice model but the total experience — and seen immediate, material increases in revenue because we made the choice process more facile.  Mint embodies this approach.

In addition, Mint.com took advantage of a couple very important trends that all firms should be watching:

• First, the millennial segment, which will have more spending power than the baby boomers by 2015, expect everything — in the immortal words of Robert Wodruff, the man who made brown fizzy sugar water into Coke! — to be “within an arms length of desire”.  In other words every competitive product needs to be at people’s fingertips, on the phone, web, and everywhere one would expect it to be.  Mint was.

• Second, this is the first generation that spent its teenage years online — and they are truly comfortable sharing all kinds of data in order to have convenience.  They also assume that things in the digital world are no more or less secure than those pieces of information floating around on pieces of paper or in file cabinets.  To them the Marketspace is just as friendly or unfriendly as the Marketplace, as Jeff Rayport and John wrote about so long ago.

• Third, they have experienced the web where poor designs are ignored, and only great design bubble to the surface.  We don’t need to speak again to the simplicity of Google, or the ease of Twitter — but these consumers don’t have to put up with anything that is not superior.  The options are a click away.

There is a useful lesson in how they got there.  Their CEO Aaron Patzer, not only has a EE and CSE degree from Duke and Princeton, but he also delves into the details in his product design as David Pakman, a partner at the venerable venture firm Venrock pointed out so articulately in his March blog entry, “Why Mint Matters: A Message to Entrepreneurs About Products”.
So, the question for your firm is are you staying complicated to make your managerial life easier, or do you have the courage to force the simplicity that the market will reward?  Or in the immortal words of your mother, “Have you cleaned your room yet?”

The Harvard Business School version of this post can be found here.

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I think the most underrated thinker of the 20th century may be Frederick Taylor.  Ironically, Taylor’s influence  on people’s day to day existence is  wider than the existentialism of Sarte.  Taylor’s basic notion of bringing science to bear in the workplace is the basis for the majority of industrial engineering, and is the progenitor of the quality movement.  His theory of Scientific Management is still the dominant mode of large organizations in search of continuous improvement.

It is a useful approach for any type of low knowledge, sequential work like assembling toys, or serving a McDonald’s hamburger.   It shines when work goes from station A, to station B, to station C, and so on in a sequence of steps which can predictably be described and analyzed.

The challenge of the modern economy is that lots of it is high value added, non-sequential work.  Making a Pixar movie has some sequential parts, but it is also a “pooled” activity in which many people work on things together — not unlike a cardiac surgical team.  I mean, your anesthesiologist is supposed to stay the whole time you are on the table.  These specialist come together to make the service possible — all at the same time, with their own roles.  A Navy pilot friend of mine also points out that special forces also work in this synchronizing manner.

Well, Taylorism, with its assumption of taking the knowledge from the worker by observation and making it available for the next laborer, does a poor job of helping high value added knowledge work which is about collaboration, creativity, and dynamic interactions.  Also, the people doing the work are often deep experts — and it is not possible to codify their best abilities as easily as in assembly work.  Yet, if you look at many of the efforts to improve productivity of high-value added workers it comes with a logic of standardization, and control.  This is why many implementations of field sales force automation systems fail — because the work is too fluid.  (I’m not saying that salespeople can’t benefit by more structure, its just that firms often go too far in their attempt to routinize the work, and because salesforces have the power inherent in any group that generates revenue, their resistance is often heeded by senior management.)

Our design cupboard seems bare.  I believe it is time to revisit the work of Doug Englebart — who created the Augmented Knowledge Workshop at Rand Corporation (and was one of the fathers of today’s personal computer revolution).  His lofty goal was to improve the collective intelligence of mankind.  How’s that for a BHAG?  His approach was a method he called H-LAM/T: Humans with language, artifacts, methods and training.  There are many things to note about this approach that are profound, but can be easily missed.  First, he notes that people, and the artifacts co-evolve.  He also notes that the language system itself heavily influences the nature of the work.  For example, Airbus’s giant 380 aircraft had a huge language compatibility problem because the German and Spanish manufacturers used an older version of the CATIA design software, and the British and French had upgraded.  The misfits due to this measured in over 500 kilometers of needed rewiring per plane!   Now that’s a language problem.

Another important part of the Englebart approach is to recognize that making people more productive means a complex match among artifacts (e.g. computers), methods (e.g. how the work is done), the language of description, and training of the individuals.  The absurd assumption of today’s knowledge work is that people need minimal training, the tools can be bought off the shelf, and the language system and methods are stable.  No wonder people default to using Taylor’s methods.

I believe it is time again to go back to the drawing board and be willing to study how people actually do the work, and what new tools may be needed to help them out.  Those who do will have breakthrough productivity.  Where will it show up?  In profit per employee.  If you take Goldman Sach’s last quarter, and annualize it, their profit per employee will be almost $500,000 per employee.  They also spend the highest percentage of revenue per employee on technology to support their work.  WalMart’s profit per employee, by contrast, is $9,000 per employee.  They can afford a Tayloristic approach.

So, are you treating your high value added knowledge workers like WalMart were Taylor still rules, or like Goldman?

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Google’s new fastflip technology which has launched with three dozen publishers — including Slate, Cosmopolitan and the New York Times — implements an idea that has been around for a long time: visual search.  I think their implementation is slick, and their mobile application — which runs on the iPhone and Android phones, is so much faster than the underlying news sites its not funny.  It actually works even on the notoriously slow AT&T network for my iPhone.

There is some debate as to whether or not this will be good for media companies.  Of course, there is a symbiotic relationship between content creators and their distributors.  Google does not want them dead, just dependent…  In a good year (2005), the New York Times has a net margin of 10%.  Google’s is 25%.  As is true in many media, the distributor makes more than the creator.  It is in Google’s interest to keep the newspapers in business.

Google — like Amazon — is first in the demand chain and because of that they have the best preference information.  Superior preference information is the key to keeping their margins high — because anyone who can deliver audience always wins.  FastFlip just helps to extend that franchise.

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One of my favorite business books of all times is The Control Revolution by James Beniger.  It has been some time since I read it, but as I remember the argument, he notes that every time there is a new method to track, move and control things — the economy creates the potential for new business models.  The famous twin innovations of the telegraph and the railroad, which many people including Al Chandler say were the necessary preconditions to modern capitalism.

It struck me that with the instrumentation of everything — from cars, to people, to the planet itself (check out both Cisco’s and IBM’s efforts on Planetary Skin and the Smart planet).  It is the tremendous amount of available data that is creating the demand for more analytics.

It is true that in history, each control revolution created new industries.  Without computers you can’t have Bloomberg.  Without miniture integrated circuits, you can’t have laproscopic surgery — which “controls” the intervention at a wholly different level.  Without extensive control systems you can’t make phone calls, or have OnStar.  I believe that as we “instrument the planet” we will continue to have more and more analysis because the opportunities for improvement will continue to increase at an increasing rate.  How can analytics help?  Here are some ways:

1. To improve the yield on assets by making them more efficient.  For example, 7-11 in Japan can restock 20% of their stores four times a day, thereby creating 60% additional “space” by slicing the location in time.
2. To improve understanding and lower risk.  For example, BP had not drilled a dry well in 15 years due to improved seismic analysis and control.
3. To create new visualizations which can allow people to “see” the issue more clearly.  At one insurance company my company is working with, we are using data visualization to help the sales and analysis department see the trade-offs more easily.

I am sure there are many more uses of analytics, and given the vast evolving instrumentation of the globe, it will only continue and improve.

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April 24th’s New York Times featured a front page (below the fold) picture (and story) of hotels.nl’s advertising on the side of sheep, bedecked with advertising blankets rented to hotels.nl for the price of one euro, per day, per sheep. It is heralded by the reporter as a wonderful example of low tech advertising, which it is. It is also a great example of generating PR from a clever idea which created media carry which they could never have achieved. Even if the below the crease front page of the NYT was for sale the way the Financial Time’s is, I doubt if hotel.nl could afford it. I’m sure the Times would cost more than the $144 Euros a day they spend on their flock of 144 grass munching billboards. I must admit that my mind reels at the potential extensions, both on the sheep and across other beasts. Should advertising on Dolly’s clones be more expensive, for her progeny are the Tiger Woods of the sheep world? Shouldn’t horses be more expensive for they are large format, and more elevated thereby likely to reach more eyeballs; or are cows the premium space because they slower moving and allow for a more complete brand impression? I can’t wait to see the pricing schedule for mammalian advertising, and the CPH (Cost Per Hoof). Interestingly, if you link this article with another in The Times about De Tijd, a Belgian financial newspaper is just is launching a $400 eInk reader later this year which will be able to download everything from newspapers to books, the sheep will eventually have active billboards for sale too, once ruggedized ePaper is available.

The serious part, to me, is not the somewhat facetious speculations into the potential extensions, but what is driving the CEO of nl.hotels and many others to search for non-traditional means to reach us? Underlying this need are at least two powerful trends: first, there is an expansion of the means and mode of the production and consumption of all information. I have argued (see my blog on the Dematuring of the TMT Cluster) that information’s supply and consumption have changed more in the past ten years than any factor in the global economy - more than food, clothing, healthcare, anything.

Given the concomitant plethora of information options for consumers, smart firms seek novelty of “location,”  such as the sheep. They seek to splice their message (or icon brand) into a highly emotional and continuous viewing event, as is done when every square inch of a NASCAR vehicle is emblazoned with brands, with messages behind the catcher on baseball games, along the boards of a hockey game, and so on. Smart companies are reemphasizing the art of product placement, which is as old as the Vatican, (if look for it you can see the parts of the Vatican built by Medici popes for their 7-ball crest is well placed) and product placement built early TV (remember the Coke Hour?).

Smart companies are reinventing their messages, and the entire way they go to market. For example, Bain & Company, a competitor of my current employer, just started using podcasts to garner interest from recruits at competitive universities in India, and plan to expand the practice. They are reinventing their voice. Companies like Toyota, are inventing new original content to be delivered to cell phones as the primary medium, supported by other complimentary media, including the web. And Microsoft just bought Massive, a start up company that places ads in video games. I am sure that this is part of their ongoing strategy to try to extract value from means that are complimentary to selling software in boxes. They are betting, I think correctly, that technologies like Massive will help advertisers get to the coveted young male while they are gaming, and not watching TV. I am not advocating cluttering games with ads, just noting it will happen, just as it has in the “real” world.

The skeptic might say this is simply a passing fad, and the sheep thing is a nice trick, but a silly one, and nothing important for “real” and “serious” brands. I disagree, because we are seeing a fundamental change in the way media are consumed, and organizations that want to get their message out must be willing to embrace a significant amount of new thinking and a willingness to experiment. This will not be an easy thing to do. Many strong consumer products companies will have to simultaneously be clear in their branding, and execute with excellence, while also creating new venues to experiment and explore the emerging media consumption patterns that are in flux and will be for the foreseeable future.

Why do I think this will continue? Well, I believe that mammalian advertising, and the fundamental changes in media creation and consumption, is a symptom of a much wider phenomenon. The fundamental thing that is going on is that we are expanding our digital information description of reality, what I call a Turing Reality (after Alan Turing who simultaneously, and separately, invented, the idea that it was possible to create a logical machine that can mimic any other logical machine every invented, and almost all of our computing devices are Turing Machines, from a logical point of view. Alonso Church was the other genius).

Who cares? Well, it is the more complete digital description of reality that makes things like entertainment interactive. As entertainment becomes interactive, every engagement with the end customer can potentially be a selling or a buying event. Again, I’m not advocating putting ads in every corner of life, and selling all the time (I even believe that in the not to distant future some brands will be differentiated by the fact that they are not pitching you when you are in their environment, just as some banks are differentiating by promising you that a human being will answer the phone, not just an interactive voice robot). I’m just predicting that more and more of our marketspace reality will be populated with advertising, product placement, and other means to “get at” the consumer who is now rarely interested in watching commercials, or listening to them, unless they are great content on their own.

How big can this get? Well, in the US alone, we spend roughly $150 billion in advertising and $250 billion in promotional activities. With the exception of direct mail, and interactive ads on Yahoo! and Google, and a few others, most of that spending is “un-addressable” in that the advertiser or company doing the promotion has only a general idea of who saw the message and what they thought of it. Statistical sampling is the mechanism of closing the loop, and the individual customers are largely unknown. Most advertisers would like to be able to talk to people directly, not just a statistical average of a type of person. Why? Because when a person is identified, they are much ease to sell to, to provide service to, and to communicate with. Again, I’m not advocating, and every digital relationship should be reversible by the end customer, e.g. you should be able to stop any and all pitches at your discretion, and live by permission marketing as Seth Godin so clearly articulated it. Nevertheless, I believe that over the coming years more and more companies will be able to metabolize this interaction data and expand the reach of their message through non-traditional means. Put another way, most of the interesting action in advertising will be in new ways of messaging, product placement, new story forms, and who knows what. I sometimes wonder if people will begin to sell their skin as an advertising medium, and for a price be willing to tattoo a brand into their skin. I imagine some placements, for some brands, would be more expensive than others, and eBay can be the pricing mechanism.

The important thing to remember is that every brand, every company, every marketer needs to take a look at what is happening and understand the evolving new means to propagate any message in this emerging Turning Reality. If you don’t you won’t even be aware that you are being bypassed, for those who only watch traditional means won’t see their own loss until it is too late.

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My friend Dan Ariely, a Professor at MIT’s Media Lab and Sloan School , and his colleague James Heyman wrote a wonderful little paper called Effort for Payment: A tale of two markets.  In this short piece they brilliantly show people operate with at least two core motivations – social and economic — and hence live in two different “markets” for all our actions.  Social markets,  when we are asked to do favors, or work for charity, or provide for love ones, are markets in which effort is independent of payment.  If you give me a little gift or a large gift, my effort does not change.  However, once you introduce a financial incentive in a social market, my effort (in their study) actually decreases, because I am now working for money, and my effort is linked to how much I get paid.  If one continues to increase payment, one can get effort back to where it was when I was working for nothing!  Put another way, a small payment is not only a bad incentive, it pollutes what otherwise was effort that did not have a price by turning a social market into a financial one. 

So what?  Well, I would argue that knowledge is usually a social good, and when an executive decides to begin to pay people for contributing their knowledge for the good of the company, it probably decreases their incentive to participate.  In my earlier blogs, Where’s Your Wiki, and wikiCalc: The next killer app?, I posit that there are “altruists” who will give knowledge to the community as part of their natural interaction.  If you begin to pay these altruists, my guess is that they will be less likely to continue participating.

Interestingly, there are many different financial markets for the facilitation of knowledge creation: the patent system is central, as is digital rights management.  Most commercial organizations do not allow their employees to harvest the benefit of patent creation.  Firms claim, rightfully, that all employees work is “work for hire,” and therefore the property of the firm.  There are incentives, usually social, and sometimes financial. 

I would argue, that most companies are much better off giving their scientists and any other knowledge worker, non-financial benefits for creating and sharing new knowledge.  Awards, recognition, and more intellectual freedom are the coin of the knowledge realm, not money.  If you begin to pay, the process will dry up.  In Dan’s experiments he found that if he gave people a small candy bar, or a lovely box of chocolates — they worked at the same level.  However, as soon as he said, “Here is a 25 cent Snickers bar, and here is a $5 box of Godiva chocolates” he found that work dropped tremendously for the 25 cent Snickers bar for once they knew the “price” of their effort they became underpaid. 

My guess is that if you want to keep things in a social market, and thereby keep effort independent of reward, you want to make sure that the recognition you provide is idiosyncratic and random — so that the recipient, and those who are watching the recipient receive the prize, cannot translate the “gift” into a money equivalent.  As soon as you say the Snickers bar is worth twenty five cents, the magic of the social market is broken, and you have to break out your wallet and begin to really pay for effort. 

It is possible to create a pay for effort system — and patents attempt to do just that — one only needs to create an incentive high enough for the exertion of great effort.  What I think is fascinating is that most organizations can benefit from lots of local sharing which can occur without financial incentives, but rather social ones.  Moreover, firms need to realize that if they pay for performance when it comes to knowledge, they better be ready to go all the way and give significant payment for significant ideas or inventions.  Giving small payment will likely cause motives to diverge, not align.  As my grandmother used to say, “In for a penny — in for a pound.” 

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Many years ago Peter Drucker pointed out, with the clarity that few management writers achieve, that corporations exist to create customers and serve them.  Marketing is the art of creating customers.  (It is true that assessing great management writers is like judging a strength contest among toddlers; nevertheless)

We are living through a radical dematuring of the Telecommunications, Media, Technology (TMT) cluster (and in here I mean cluster the way Michael Porter outlined it in his book The Competitive Advantage of Nations) and it is as tumultuous today as when the telegraph was playing the global cat and mouse game with the telephone. 

By dematuring I draw upon a definition I found in a wonderful, but rarely read book called, Industrial Renaissance, by Abernathy, Kantrow and Clark.  These authors were fascinated by the question: How did the Japanese car manufacturers successfully enter the US market in the early 1970s when it was dominated by four powerful incumbents: GM, Ford, Chrysler and American Motor Corporation (AMC)?  They theorized that the market had “dematured” due to three interlocking reasons: first, customers were buying new capability, safety and gas mileage instead of horsepower and size; second, core technologies of the product were changing, turbo charging versus carburetion, disk brakes versus drum brakes; and third, the number of “equivalent” competitors increased, as measured by revenue.  If memory serves, Toyota was as big as AMC and growing; Honda was large too. 

Today, we see the TMT cluster dematuring.  Why?  Well, the number of equivalent competitors is increasing as telephony companies, like Verizon and Sprint, fight it out with cable companies such as Comcast and Time Warner.  The “product” people are buying has changed, when you get a phone do you add the picture capability?  Text messaging?  Data too?  A phone is not just a phone; and a phone service is not just a phone service.  Lastly, the fundamental technologies of production have changed, for a voice call can be created by a telephony infrastructure, or by a internet protocol based packet infrastructure.  Similarly, the wireless carriers are deploying radically different production technologies from EVDO to Mediaflo, hoping to create a better and more effective service. 

So what?  Well, if you investing in the cluster, you need to be very, very careful about traditional metrics, and risks.  Your financial models need to be able to take into account low probability, high impact events, like Google actually pulling off a nation wide WiFi network!, or other wild ideas.  It needs to take into account the radical changes in production technology like IP-based telephony.  You need to consider disruptive innovations like Hotxt, which is a service in the UK, which allows you unlimited short messaging service (SMS) for “1 per week” by routing them over the IP network, not the carrier’s SMS network to other Hotxt users.  Given how important SMS revenue is to European telcos, this little company could be a very big deal.  Investing in a dematuring cluster can be exhilarating and rewarding, but also dangerous. 

For the non-TMT-cluster folks – like you and me — the real issue is how do we get our message to market?  In the past ten years, consumption of information has changed more and more rapidly than any other consumer good.  The same is true of how organizations use information, just look at all the blackberries at any airport. 

Getting you message out now means not just considering where you are physically, but what information spaces do you dominate and populate?  You need to consider what social groups you are influencing.  In talking recently with Brewster Kahle, founder of the internet archive, he said their analysis of blogs found out that readership is easy to create, it is dependent on the frequency of update.  So, you have to ask yourself, where is your brand and reputation “active” and is it online too?  You need to understand how to take every type of information you think is important from a marketing perspective and make sure it fits on a cell phone, for this is the frequent information environment for most people, and in the developing world, the only digital information environment for most, and the most rapidly growing. 

You need to be able to deal with the new media companies like Google and Yahoo, and keep an eye out on even newer ones like Hotxt.  In the immortal words of Drucker it is all about making customers and serving them.  The dematuring of the TMT cluster means that those in the cluster have to rethink both making and serving, the rest of us have to worry through the new rules of making customers. 

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A few weeks ago  I was presenting an approach to management that was at its core a “scientific” approach; not in the narrow Frederick Taylor sense of time and motion studies, but in the more knowledge-worker-friendly notions taking information about the business, and the market, and turning it into value as fast and efficiently as possible. 

The simple model I proposed suggested that there is an information cycle in organizations that progresses from: ambiguity, to uncertainty, to complexity, to velocity, and then back to uncertainty.  In an ambiguous state, it is impossible to describe the customer’s needs fully, and only through deep and frequent interaction with the clients will there be progress toward workable solutions.  I used the example of Illinois Tool works as a company that deals effectively with ambiguity, because they work deeply with their customers to create new solutions, even to the point of reinventing basic products, like the lowly screw. 

After ambiguity, there is a stage where the organization can begin to describe the problem in a reliable language of description.  Credit card issuance has uncertainty, but no ambiguity.  Once something is described well, then the competitive landscape shifts to being about to deal with complexity, and then to deal with that complexity faster, and faster, hence velocity.

As I presented this model, with examples, a very wise, articulate senior intelligence official, who looks a bit like the Oracle in the movie The Matrix spoke up and said, “It is the role of leaders to create ideology, to absorb ambiguity for the organization.”  When she said this, I had one of those telescopic moments where it felt like she and I were in direct connection, in a small room talking one-on-one, despite the fact that we were in a room of 100 people.

In that one phrase she captured for me the core duality of management.  On the one hand, a leader in an organization needs to be scientific; scientific about customers, about people’s performance, and scientific about the movements in the marketplace.  On the other hand, they need to create ideology to fill in meaning for those who come to work each day.  Sometimes this duality is invigorating; sometimes debilitating.  The important thing, to me anyway, is to know when you are doing science, and when creating ideology. 

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Well, I have to admit it.  I was wrong, so wrong.  As the father of five, and someone married to the same Eileen Marie Harvey for 25 and 1/2 years, you would think I would be used to being wrong.  And yes, I don’t get that, Lord of the Manor feeling when I arrive home, but I’m usually pretty right in my professional predictions.

But, I wrote an article this past summer for Fast Company magazine in which I said that the iPod was doomed because it was not part of an open ecosystem of innovation.  The closed architecture of the iPod, I reasoned, was going to mean that the cluster of potential innovations was going to surpass it. Well, I missed the point that the real innovation ecosystem is a two sided information market, in which Apple allows for creation of a highly subsidized market for music, podcasts, and new forms while they extract value from their beautiful devices, from the Shuffle to the iPods. 

As others have pointed out, the key to robust information markets is to subsidize one “side” of the market to generate value for another “side” and then have a strong business model which can extract value clearly from one side.  By creating a player that allows the playing of illegal music easily, along side legal music, Apple made the music on their devices “subsidized,” and got the combined traffic of those who wanted stuff for free, and those willing to play.  I would bet, for example, the majority of music on most iPods is illegal, but some of it is paid for, and that is good news to the music industry for they are getting value.  When there is a rampant illegal market, it is in the best interests of the “property owners” to somehow integrate the traffic of the illegal market with the legal, for over time you can begin to extract value and cooption is cheaper, and more effective than prosecution. 

Apple does not make much, if any, money on the early downloads at 99 cents a piece, the real margins are in the players; again, subsidy, of the legal stuff.  Now, over time, they may be able to have higher margins, and I don’t know what they make on the new TV video offers, but the market was established with subsidy on the content side. 

Add to this the fact that they have the only designers in the space that actually design anything, as opposed to simply putting function in a device, and letting the user figure it out, and you have the industry dominant player that has a vast market share and traffic. 

Other two sided markets that dominate include: Window’s willingness to subsidize developers and charge end users; Thomas Dolby did not charge component manufacturers, nor end users for using Dolby Sound.  He charged the electronics manufacturers.  Google gives us all lots of functionality and charges advertisers who want to get to us: again a two sided market.

So, I hate to be wrong, but I love the two sided market thing.  In the information world, there are just so many that win, and so many to be born.

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