Authors: Thomas L. Friedman
One of those big companies that have learned to act small in this way is E*Trade, the online bank and brokerage house. It did so, explained Mitchell H. Caplan, the CEO of E*Trade as well as a friend and neighbor, by recognizing that behind all the hoopla around the dot-com boom and bust, something very important was happening. “Some people thought the Internet was going to revolutionize everything in the world with no limits-it was going to cure the common cold/' said Caplan. Sure, it was hype, and it led to crazy valuations and expectations, which eventually came crashing down. But meanwhile, with much less fanfare, the Internet was creating ”a whole new distribution platform for companies to reach consumers in a whole new way and for consumers to reach your company in a whole new way,“ Caplan said. ”While we were sleeping, my mom figured out how to use e-mail and connect with the kids. My kids were instant-messaging all their friends. My mom figured out how to go online and check her E*Trade balances.“
Companies that were paying attention understood they were witnessing the birth of the “self-directed consumer,” because the Internet and all the other tools of the flat world had created a means for every consumer to customize exactly the price, experience, and service he or she wanted. Big companies that could adapt their technology and business processes to empower this self-directed consumer could act very small by enabling their customers to act very big. They could make the consumer feel that every product or service was being tailored for his or her specific needs and desires, when in fact all that the company was doing was creating a digital buffet for them to serve themselves.
In the financial services industry, this constituted a profound change in approach. Historically, financial services was dominated by large banks, large brokerage houses, and large insurance companies that told you what you were getting, how you were getting it, when and where you were getting it, and the price you had to pay for it. Customers reacted to these big companies with emotions ranging from apathy to distaste. But if I didn't like the way my bank was treating me, I didn't have any real choice. Then the world was flattened and the Internet came along. Consumers started to feel that they could have more control, and the more they adapted their buying habits to the Internet, the more companies-from booksellers to financial services-had to adapt and offer them the tools to be in control.
“Sure, the Internet stocks blew up when the bubble burst,” said Caplan, whose own company's stock price took a big dip in that market storm, “but underneath, consumers were getting a taste of power, and once they tasted it, things went from companies being in control of consumers' behavior to consumers being in control of companies' behavior. The rules of engagement changed, and if you did not respond and offer customers what they wanted, someone else would, and you would be dead.” Where once the financial services companies acted big, now they strove to act small and to enable the consumer to act big. “Companies who prosper today,” argued Caplan, “are the ones who understand the self-directed consumer.” For E*Trade, that meant thinking of the company not as a collection of individual financial services-a bank, a brokerage, and a lending business-but as an integrated financial experience that could serve the most self-directed financial consumers. “The self-directed consumer wanted one-stop financial shopping,” said Caplan. “When they came to our site they wanted everything integrated, with them in control. Only recently, though, did we have the technology to really integrate all our three businesses-banking, lending, and brokerage-and pull them together in a way that didn't just deliver the price, not just the service, but the total experience they wanted.”
If you came to the E*Trade site just three or four years ago, you would see your brokerage account on one screen page and your lending on another. Today, said Caplan, “On one page you can now see exactly where you stand in terms of your brokerage in real time, including your buying power, and you see your bank account and the scheduled payments for your loans-what is pending, what is the balance on your home mortgage, and [what is your] line of credit-and you have the ability to move seamlessly between all three to maximize the benefit of your cash.”
While Fadi Ghandour coped with the triple convergence by taking a small company and devising a strategy to make it act very big, Mitchell Caplan survived by taking a big company and making it act very small so that his customers could act very big.
Rule #4: The best companies are the best collaborators. In the flat world, more and more business will be done through collaborations within and between companies, for a very simple reason: The next layers of value creation-whether in technology, marketing, biomedicine, or manufacturing-are becoming so complex that no single firm or department is going to be able to master them alone.
“What we are seeing in so many different fields,” said Joel Cawley, the head of IBM's strategic planning unit, “is that the next layers of innovation involve the intersection of very advanced specialties. The cutting edge of technical innovation in every field is increasingly specialized.” In most cases, your own company's or your own department's specialization is going to be applicable to only a very small piece of any meaningful business or social challenge. “Therefore, to come up with any valuable new breakthrough, you have to be able to combine more and more of these increasingly granular specialties. That is why collaboration is so important,” Cawley said. So you might find that a pharmaceutical company has invented a new stent that allows it to dispense a whole new class of drugs that a biomedical company has been working on, and the real breakthrough-where the real profit is created for both-is in their collaboration in getting the breakthrough drugs from one firm together with the breakthrough delivery system from another.
Or take a more colorful example: video games. Game makers have long been commissioning special music to go with games. They eventually discovered that when they combined the right music with the right game they not only sold many, many more copies of that game, but they could spin off the music for sale on CD or download as well. So some big game companies have recently started their own music divisions, and some artists have decided that they have a better chance of getting their music heard by launching it with a new digital game than on the radio. The more the flattening of the world connects all the knowledge pools together, the more specializations and specialists there will be out there, the more innovation will come from putting them together in different combinations, and the more management will be about the ability to do just that.
Perhaps the best way to illustrate this paradigm shift and how some companies have adapted to it is by looking at a very traditional manufacturer: Rolls-Royce. When you hear the word “Rolls-Royce,” what immediately comes to mind is a shiny handmade car, with a uniformed chauffeur sitting in the driver's seat and a perfectly tailored couple in the back on their way to Ascot or Wimbledon. Rolls-Royce, the quintessential stodgy British company, right? What if I told you, though, that Rolls-Royce doesn't even make cars anymore (that business was sold in 1972 and the brand was licensed to BMW in 1998), that 50 percent of its income comes from services, and that in 1990 all of its employees were in Great Britain and today 40 percent are based outside of the United Kingdom, integrated into a global operation that stretches from China to Singapore to India to Italy to Spain to Germany to Japan and up to Scandinavia?
No, this is not your father's Rolls-Royce.
“Quite a long time ago we said, 'We cannot be just a U.K. company,'” Sir John Rose, chief executive of Rolls-Royce PLC, told me in an interview while we were both visiting China. “The U.K. is a tiny market. In the late 1980s, 60 percent of our business was defense [particularly jet engines] and our primary customer was Her Majesty's government. But we needed to become a world player, and if we were going to do that we had to recognize that the biggest customer in everything we could do was the U.S., and we had to be successful in nondefense markets. So we became a technology company [specializing in] power systems.” Today Rolls-Royce's core competency is making gas turbines for civilian and military airplanes, for helicopters, for ships, and for the oil and gas and power-generation industries. Rolls-Royce has customers now in 120 countries and employs around thirty-five thousand people, but only twenty-one thousand are located in the United Kingdom, with the rest part of a global network of research, service, and manufacturing workers. Half of Rolls-Royce's revenue is now generated by businesses outside the United Kingdom. “In the U.K. we are thought of as a British company,” said Rose, “but in Germany we are a German company. In America we are an American company, in Singapore we are a Singaporean company-you have to be in order to be close to the customer but also to the suppliers, employees, and communities in which we operate.” Today Rolls-Royce employs people of about fifty nationalities in fifty countries speaking about fifty languages. It outsources and offshores about 75 percent of its components to its global supply chain. “The 25 percent that we make are the differentiating elements/' said Rose. ”These are the hot end of the engine, the turbines, the compressors and fans and the alloys, and the aerodynamics of how they are made. A turbine blade is grown from a single crystal in a vacuum furnace from a proprietary alloy, with a very complex cooling system. This very high-value-added manufacturing is one of our core competencies.“ In short, said Rose, ”We still own the key technologies, we own the ability to identify and define what product is required by our customers, we own the ability to integrate the latest science into making these products, we own the route to the market for these products, and we own the ability to collect and understand the data generated by those customers using our products, enabling us to support that product while in service and constantly add value.“
But outside of these core areas, Rolls-Royce has adopted a much more horizontal approach to outsourcing noncore components to suppliers anywhere in the world, and to seeking out IQ far beyond the British Isles. The sun may have set on the British Empire, and it used to set on the old Rolls-Royce. But it never sets on the new Rolls-Royce. To produce breakthroughs in the power-generation business today, the company has to meld together the insights of many more specialists from around the world, explained Rose. And to be able to commercialize the next energy frontier-fuel cell technology-will require that even more.
“One of the core competencies of the business today is partnering,” said Rose. “We partner on products and on service provisions, we partner with universities and with other participants in our industry. You have to be disciplined about what they can provide and what we can sensibly undertake... There is a market in R & D and a market in suppliers and a market in products, and you need to have a structure that responds to all of them.”
A decade ago, he added, “We did 98 percent of our research and technology in the U.K. and now we do less than 40 percent in the U.K. Now we do it as well in the U.S., Germany, India, Scandinavia, Japan, Singapore, Spain, and Italy. We now recruit from a much more international group of universities to anticipate the mix of skills and nationalities we will want in ten or fifteen years.”
When Rolls-Royce was a U.K.-centric company, he added, it was very vertically organized. “But we had to flatten ourselves,” said Rose, as more and more markets opened worldwide that Rolls-Royce could sell into and from which it could extract knowledge.
And what does the future hold?
This approach to change that Rolls-Royce has perfected in response to the flattening of the world is going to become the standard for more and more new start-up companies. If you were to approach venture capital firms in Silicon Valley today and tell them that you wanted to start a new company but refused to outsource or offshore anything, they would show you the door immediately. Venture capitalists today want to know from day one that your start-up is going to take advantage of the triple convergence to collaborate with the smartest, most efficient people you can find anywhere in the world. Which is why in the flat world, more and more companies are now being born global.
“In the old days,” said Vivek Paul, the Wipro president, “when you started a company, you might say to yourself, 'Boy, in twenty years, I hope we will be a multinational company.' Today, you say to yourself that on day two I will be a multinational. Today, there are thirty-person companies starting out with twenty employees in Silicon Valley and ten in India... And if you are a multiproduct company, you are probably going to have some manufacturing relationships in Malaysia and China, some design in Taiwan, some customer support in India and the Philippines, and possibly some engineering in Russia and the U.S.” These are the so-called micromultinationals, and they are the wave of the future.
Today, your first management job out of business school could be melding the specialties of a knowledge team that is one-third in India, one-third in China, and a sixth each in Palo Alto and Boston. That takes a very special kind of skill, and it is going to be much in demand in the flat world.
Rule #5: In a flat world, the best companies stay healthy by getting regular chest X-rays and then selling the results to their clients.
Because niche businesses can get turned into vanilla commodity businesses faster than ever in a flat world, the best companies today really do get chest X-rays regularly-to constantly identify and strengthen their niches and outsource the stuff that is not very differentiating. What do I mean by chest X-rays? Let me introduce Laurie Tropiano, IBM's vice president for business consulting services, who is what I would call a corporate radiologist. What Tropiano and her team at IBM do is basically X-ray your company and break down every component of your business and then put it up on a wall-size screen so you can study your corporate skeleton. Every department, every function, is broken out and put in a box and identified as to whether it is a cost for the company or a source of income, or a little of both, and whether it is a unique core competency of the company or some vanilla function that anyone else could do- possibly cheaper and better.