Seismic Digital Shift: Rethinking Our Digital Future 9819959527, 9789819959525

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Seismic Digital Shift Rethinking Our Digital Future Yong Hu

Seismic Digital Shift

Yong Hu

Seismic Digital Shift Rethinking Our Digital Future

Yong Hu Peking University Beijing, China

ISBN 978-981-99-5952-5 ISBN 978-981-99-5953-2 (eBook) https://doi.org/10.1007/978-981-99-5953-2 Jointly published with China Renmin University Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: China Renmin University Press. ISBN of the China (Mainland) edition: 978-7-300-14948-6 © China Renmin University Press 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover credit: Marina Lohrbach_shutterstock.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Paper in this product is recyclable.

Preface

Rethinking Our Digital Future “We March Backwards into the Future” According to Brian Arthur in his book The Nature of Technology, new technologies are not “invented” out of nothing; the technologies we know are created (constructed, aggregated, integrated) from pre-existing technologies. In other words, technology is composed of other technologies. So, how to distinguish between old and new technologies? People often resort to a method of describing the features that are available in the new technology but not in the old one. While this enhances people’s knowledge of new technologies, it also signals a huge problem: people’s predictions of the future are thus always limited by reality, and they can only imagine a more sophisticated and advanced version of what already exists. Consider the phrase “horseless carriage”, the term used when the automobile was first invented. Its association with prior technology is not only in nomenclature, but also in visuals. The early design of the automobile clearly retained much of the appearance of the horse-drawn carriage. The first generation of automobile engineers placed passengers in the front part of the vehicle—just like in a horse-drawn carriage. Unfortunately, once a car accident occurred; it was almost always fatal. It was not until later designers abandoned the metaphor of the horseless carriage and had

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the driver and passengers situated behind the engine rather than in the front. This story illustrates our tendency not only to base new inventions on the old ones, but also to try to explain new inventions in terms of what we already know. Like a horse with a blindfold on its eyes, the inventor of the automobile could not have foreseen the dramatic changes the automobile would bring to people’s work and lives, including how we would build and utilize cities with automobiles, or how we would acquire new business models and create derivative businesses. It is hard to imagine, for example, the fault-free insurance for automobiles in the days of driving horses and carriages. As Marshall McLuhan says, “We look at the present through a rear-view mirror. We march backwards into the future.” As a result, we should study technologies by playing backwards the technological explosion of the past in order to see the long historical process of their impact on social experience and social organization, just as an artist needs to conceive a work of art in reverse order from end to beginning. Only by playing backwards can we discover the unfamiliar in the familiar, experience the old in the new, and perceive the shocking aspects of it. “Digitalization” Has Become a Daily Routine After years of technological forging, we have entered a digital society, or a digital state of being. In 1999, in order to promote the Internet in China, a very sensational “72-hour Internet survival test” was implemented in Beijing, Shanghai and Guangzhou, where volunteers were locked up in hotel rooms to see if they could survive through the Internet alone. In those days when there was no Taobao, no Alipay, no courier service, many volunteers had to quit halfway because they could not stand the hunger. In 2016, in tribute to that event in 1999, Shanghai launched a “72-hour Internet-free survival test,” and the most common comment from the volunteers afterwards was “These days are like years.” This example is a vivid illustration of how the Internet has turned our living state upside down. To a large extent, the Internet has become the medium of choice for our daily interactions and transactions. We cannot work without the Internet in almost everything we do, whether it is ordering takeout, buying something, working remotely, sharing time with friends, or sending photos via instant messaging. Today, we are just a click away from reading local newspapers and getting the latest news

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from anywhere in the world, and it is updated in real time. And the act of consuming media has created a whole new form never before seen in human history—a social data layer, which tells the story of what we like, what we watch, who and what we follow, and where we are when we do so. The Internet itself has also undergone dramatic change. Historically, the early Internet was a static network designed to transmit a small number of bytes or short messages between two endpoints. The Internet was a repository of information, with only professional coders publishing and maintaining content. Today, however, vast amounts of information are uploaded and downloaded via this electronic behemoth, and the content is entirely generated by the users themselves, as everyone is now a reviewer, a publisher and a creator. From the 1980s to the 1990s, the Internet expanded from an exclusive privilege of universities and research centers to a powerful technosocial assemblage encompassing public entities, institutions, and private enterprises around the world and even private users. It was no longer a state-controlled project, but the world’s largest computer network, including tens of thousands of subnetworks, millions of systems, and hundreds of millions of users. The network has become an inexhaustible source of information. More importantly, it enables users to change from their former passive role to an active one, no longer just a receiver on traditional media, but one who can choose for themselves what information they receive, how they receive it, and when to receive it. Information receivers can even decide whether they want to stay informed. At the same time, the Internet is no longer solely focused on information exchange—it has become a complex multidisciplinary tool that enables people to create content, communicate with each other, and even escape reality. We can send data anywhere in the world in seconds, buy and sell all kinds of goods and services, and live in parallel “game worlds” while sharing our real lives and real identities using photos, videos, sounds, and texts. Personal stories may become public everywhere, and all local issues can be global issues. The Internet is a hotbed of innovation. It has brought breakthroughs in almost every area of endeavor, including the creation of new goods, services, and ideas that foster social development and enhance the wellbeing of people. The Internet has also brought culture closer and closer to

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more people, making it more easily and quickly accessible. It has also facilitated the rise of new forms of artistic expression and the dissemination of knowledge. Digitization has triggered fundamental changes throughout society as humanity moves from the industrial age to the networked age. In our world, the global information network is the critical infrastructure that has freed us from geography and allowed us to gather in communities based on interests, identities, and themes that are not confined to any particular location. It has transformed every area of government, business, finance, entertainment, education, healthcare, transportation, and even the way we interact with our loved ones, becoming one of the main drivers of social development in the twenty-first century. Along with this leap, the concept of “digital” itself has gradually lost its meaning. Digital was once synonymous with the future, implying sophistication, speed, and high technology. But today, digital technology applies to almost everything: the music we enjoy, the shows we watch, the purchases we make, the social media we share, the apps we live by, the software we work with, and so on. In an age where everything is digital, what does “digital” really mean? For some on the cutting edge, it means quantum computing and AI-driven innovation; but for many ordinary people, it simply means embracing the tools that make our work and lives more efficient and connected. In many ways, digitization is nothing more than daily operations, as all digital technologies are already seamlessly integrated into our daily lives. So, we must think: What is next after digitalization? The Old Regime and the Digital Revolution On the surface, the digital society no longer exudes the magic that makes it so exciting. Today, the new topics people are excitedly talking about are Big data, the Internet of Things, new energy sources, artificial intelligence (AI), life sciences, space exploration, and so on. Computers and mobile devices are becoming increasingly tasteless as they are gradually eclipsed by other things, such as self-cleaning shirts, driverless cars, service robots, smart doorknobs, and even a pill that gives you an instant grasp of English language. In Negroponte’s words, we will live in computers, wear them on our bodies, and even feed on them. As an English proverb goes like this, “An apple a day will keep the doctor away.”

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From this point of view, the digital revolution is over. So when Negroponte was invited by me to write the preface for the 20th-anniversary Chinese edition of Being Digital, he chose the title “Been Digital.” However, the profound process of power transfer between producers and consumers, governments and citizens, mass media and receivers, is still ongoing and is far from reaching a new equilibrium. In this sense, the digital revolution still has a long way to go, or rather, the problem of “been digital” is tougher than “being digital.” This is where I find the paradox of today’s digital life—there are countless people who care about digital business today, but conversely there are few concerned to address the fundamental issues of digital community. The fundamental issues that need to be solved are overwhelming, such as the conflict between individual privacy and social openness, security and freedom, business and community, government surveillance and individual autonomy, and thriving creativity and protecting intellectual property. I summarize these conflicts as a clash between the old system and the great digital revolution, attributable to the fact that the Internet has finally arrived at the level of social arrangements or institutional forms from the level of tools or practices. The relationship between the Internet and civilization has become indistinguishable. When discussing the Internet in this context, it is most important to return to the original point and consider a central question: What is the Internet? It is a question that sounds simple but is complex to answer, and that seems to have been answered but has never received a real answer. There are two ways to answer this question: first, conceptualizing the Internet; second, imagining the Internet. What exactly is the Internet? How do we understand this ubiquitous and familiar thing in our everyday world? What can the Internet do? Of all the things it can do, what is new? What new ethical, social, and political capabilities does it trigger? What has it made obsolete, problematic, or even impossible? As the world around us continues to reorganize, the techno-social assemblage we call the Internet poses key challenges to many familiar assumptions as well as to our imagination. How do we view these challenges? The first perspective starts with everything that is known about the Internet; the second perspective starts with what we can expect from him in the near and even more distant future. To do this, we need both a new value theory (involving ethics and

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political philosophy) and a new epistemology (involving theories about knowledge and science). Inevitably, our reasoning and imagination must reach a level where: what exactly can constitute the definition of a person in a fully networked environment? What does it mean to be human? What is human nature? This is in fact the question of the possibilities of Internet civilization, and ultimately the question of human possibilities—in the near future, we may reach a “post-human state.” The road ahead is rocky, and the rethinking of digitalization has only just begun. We cannot yet fully conceive of a new world in which our sense of identity and community truly coexist in both the real and virtual realms. When climbing mountains, the higher the altitude, the thinner the air. But today, we did not really experience “oxygen deprivation” because we have not reached the summit of the digital world, or even the “digital” base camp at the bottom of the mountain. We need to live very differently, and that requires very different thinking. Perhaps like the Enlightenment, what we need is another revolution of the mind. Beijing, China

Yong Hu

Contents

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Insight into the Forefront: On the Trends 1 Atoms and Bits 1.1 From Science Fiction to History 1.2 When Atoms and Bits Become One 1.3 Will Computers Become the Next Form of Life 2 Mobile Megatrends and Social Change 2.1 Is Facebook Overvalued? 2.2 The Web Is Dead: Long Live the Internet 2.3 Mobile Computing for Contextual Awareness 2.4 Behavioral Science from the Perspective of Big Data 3 The Pitfalls of Big Data 3.1 Subjectively Acquired Signals and Noises 3.2 History cannot Reveal the Future 3.3 Context is the Key 4 Heraclitus’ Law 4.1 Winner Takes All 4.2 Four Dimensions and Five Characteristics of Platform Companies 4.3 Lessons from the Development of the Internet: Heraclitus’ Law 4.4 Technology Bubble Likes Financial Bubble

1 1 1 4 7 9 9 11 15 16 18 19 20 21 23 23 26 27 30

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Let us Open Assets, Data, and Minds—Preface to Peers Inc A Seismic Digital Shift Is Occurring Everywhere 6.1 Worldview: A Different Perspective on the World 6.2 The Margin Becomes the Center 6.3 The Internet Revolution Is a Marginal Revolution 6.4 The Two Main Directions of Innovation 6.5 From the Editorial Office to the Classroom and the Clinic 6.6 The Internet Breeds New Continents The Road of Transformation of China’s Manufacturing Industry 7.1 CPS: The Mutual Mapping of the Real and the Virtual 7.2 Manage Low-Dimensional Space from High-Dimensional Space 7.3 CPS and Industry 4.0 Manufacturing and the Internet Must Be Integrated 8.1 How to Redefine Traditional Manufacturing 8.2 The Manufacturing Industry and the Internet Should Accommodate with Each Other 8.3 The Dialectic Between Bits and Atoms 8.4 The Impact of the Internet of Everything on Manufacturing Four Challenges in Digital Transformation for Enterprises 9.1 A Matchup Where the Big Companies Do Not Have the Upper Hand 9.2 Why Transformation

First to the Top: On Strategy 1 The Rise of Social Companies 1.1 Why People Need to be Tenaciously Connected to Each Other 1.2 Networked Individualism 1.3 Platformization of the Companies and Datafication of Users 1.4 The Need for Agile Enterprises

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Beyond a Single Platform Strategy 2.1 The Six Rules of Open Platform 2.2 Realization of Network Effects Do You Need a Strategy? 3.1 The Absence of Strategy Also Has Its Benefits 3.2 Strategy Is an Art Looking Inward or Outward—A Strategic Choice for Companies in the Digital Age 4.1 Pros and Cons of Each of the Two Strategies 4.2 Seize the Opportunity Through Both Internal and External Endeavors 4.3 Three Major Tasks of a Distinctive New Strategy Paradox as a Path Forward 5.1 Everything in Business Constitutes a Paradox 5.2 Paradoxes: Both Confusing and Inspiring Challenges 5.3 Decline After Success 5.4 Getting Out of the Either/Or Box Dynamic Capabilities Determine the Speed Swimming Across Under the Winds of Change The Crazy Steve Jobs The 10-Year Test for Business Leaders 9.1 Cult of the CEO 9.2 Corporate Parabola 9.3 Steve Jobs’ Legacy From Good To Great To Unstoppable 10.1 Prophets Who Foresee Strong Earthquakes 10.2 Solving Big Problems in Big Markets 10.3 The Revolution in Business Automation 10.4 The Water System of the Largest River 10.5 The Flywheel Effect Overcomes the Doom Loop 10.6 Keep the Reckless Spirit of a Startup Sony: A Counterexample to Apple 11.1 Walkman Versus iPod 11.2 Lost in the Digital Age 11.3 To End the Uncertainty of Strategy

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82 82 85 87 87 88 92 92 94 95 96 96 97 99 100 102 105 109 114 114 117 117 121 121 122 126 130 138 142 147 147 151 162

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No Pain No Gain: On Organization 1 What Makes a Company Great? 1.1 Collins Dictionary 1.2 Collins’ Misconceptions 2 P&G’s “One to Eight” Innovation Route 2.1 One Core Organizational Principle 2.2 Two “Key Moments” 2.3 Three Strategies for Innovative Growth 2.4 Four Tasks of an Innovation Leader 2.5 Five Key Things to Do for Innovation 2.6 Six Factors for Designing an Innovative Organization 2.7 Seven Definitions of a Game Changer 2.8 Eight Drivers of Corporate Innovation 3 Companies That Seek Change 3.1 Why Change Management Does Not Work 3.2 The Changes That Change 3.3 The Machine Metaphor Is Outdated 3.4 Evolution and Experimentation 4 A Chaordic World 5 Coasean Ceiling and Floor 5.1 Hierarchical Organization and Transaction Costs 5.2 Hiding Under the “Coasean Floor” 6 Hacker Culture and the New Organization Theory 6.1 Hackers, the Cowboys of the Computer Age 6.2 Open Source in the Bazaar and Closed Source in the Cathedral 6.3 Knowledge Dispersion and Network Decision Making 7 Four Pitfalls for Entrepreneurs 8 From Big Company to “Entrepreneurial Company” 8.1 The Rise of the Network Enterprise 8.2 One Person Is a Company 8.3 Imbalance of Network Organization 9 The Best Enterprise Leader Becomes the Enemy of the Enterprise 9.1 The Management Science Has Come to an End 9.2 The New Way of Organizing the Economy Will Be More Like the Marketplace

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Talent Has No Limits: On the Right Talent 1 The Boundary Between Innovation and Imagination 1.1 High-Imagination-Enabling Countries and Low-Imagination-Enabling Countries 1.2 Think Like Three Groups of People 1.3 The Era of Personal Globalization 2 Are Humans Selfless, or Selfish?—Reflections on The Penguin and the Leviathan 3 To Nudge? Or Push Strongly? Or Simply Kick the Buddy? 4 Gamification and Cold War Thinking 4.1 Gamified Management: Employees and Users 4.2 To Resist the Digital Self 5 Chinese Wisdom in the Quantum World 6 Collaboration Changes the World—Preface to the Wikinomics 7 The Longitude and Latitude of Our World 7.1 The Mystery of Longitude That Determines Maritime Supremacy 7.2 Where to Buy the Coolest T-Shirts? 7.3 Communities Are More Effective Than Companies 8 Employees Are Always Smarter Than Bosses

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Capturing Mindshare: On the Digital Consumer 1 Every Company Is a Stage 1.1 Service Is Being Replaced by Experience 1.2 The Beauty of Experience 1.3 N = 1, R = G 2 Is Free a Business Model? 2.1 The Price Paradox of High Technology 2.2 Freemium 2.3 Network Effect 3 What Is a “Big Product”? 3.1 Product Is Information 3.2 From Single Value to Interactive Value 3.3 Product Is Communication 4 Mobile Internet Thinking Is Touchpoint Thinking 5 How Companies Master the Play of Social Platforms 6 Who Decides the Brand Reputation 7 The Essence of Social Marketing

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Three Major Changes in Media Consumption Markets Are Conversations The Essence of Social Marketing: Using People as a Medium 7.4 Nine Strategies to Reach Social Marketing Goals 7.5 Common Challenges in Social Marketing Community Economy and Fan Economy 8.1 Community Economy and Pseudo-Community Economy 8.2 Community Economy Versus Fan Economy 8.3 Current Situation and Outlook of Community Economy Mutual Enhancement of Red Packets and Social Networking—In-Depth Analysis of WeChat Red Packet Design 9.1 Social + Payment 9.2 WeChat Red Packet as a Social Lubricant 9.3 The Cultural Soil of Red Packets 9.4 Conclusion Intention Economy—Seller Beware 10.1 Not Attention Economy, But Intention Economy 10.2 Tell the Market What We Consumers Want

One Step Ahead: On China’s Practices 1 Chinese Strategists 2 Liu Chuanzhi’s Dream of a Century-Old Company 3 Make Employees “Internal Entrepreneurs” 3.1 From “Instinct” to “Meaning” 3.2 Get Rid of Purely Contractual Relationships 3.3 From Management Innovation to Social Invention 3.4 From Decentralization of Authority to Intrapreneurship 3.5 The Competition of Management is the Most Important Competition of Innovation in the Future 4 Tencent Must Prove Itself as a Technology Company 5 Air of Innovation

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List of Figures

Chapter 1 Fig. 1 Fig. 2

Two dimensions of effective management The third path to the networked organization

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Chapter 2 Fig. 1 Fig. 2

Real-time enterprise cyclones Amazon flywheel

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CHAPTER 1

Insight into the Forefront: On the Trends

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Atoms and Bits

No more moving atoms, but bits.

1.1

From Science Fiction to History

The year 2016 marks the 20th anniversary of the Chinese edition of Being Digital (1996). Over the years, I have had at least four meetings with the author, Professor Nicholas Negroponte, in China, and come across him once in the Media Lab at MIT. Whenever I am with him, I always heard people ask him the question: Since the publication of Being Digital, which predictions in the book have come true and which have not? In fact, it is a matter of a futurist’s ability to “see through the crystal ball.” Negroponte predicted too many things. For example, while Microsoft, Apple, and others developed the stylus technology, Negroponte insisted that the finger would be the best stylus. He hoped that one day an interface agent would be the one to order our lives. This is exactly what Google Now, Apple’s voice assistant, Siri, and Microsoft Xiaoice are working toward. He foresaw the inevitable restructuring of the media world—a shift from the domination of large hierarchical institutions to new decentralized “cottage industries” and the consequent emergence of e-books and personalized newspapers. He also put forward a distinctive

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 Y. Hu, Seismic Digital Shift, https://doi.org/10.1007/978-981-99-5953-2_1

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slogan, “No more moving atoms, but bits,” and believed that humanity would inevitably go digital, whether for news, entertainment, or sex. One reader said to me, “When I read Being Digital 20 years ago, I thought it was a science fiction book; now I read it, I think it is a history book.” Such a comment is the highest praise for a futurist. Looking back at that era from today, perhaps we can truly understand what “being digital” really is. It means that the world of entertainment is fully integrated with the world of information and develops interactivity; it means that computers are resident in human life and you utilize this presence at all times as a way of life and as an attitude; it constitutes an egalitarian phenomenon, making people more accessible and allowing low solitary voices to be heard in a large empty space; it flattens organizations and breaks down traditional centralization, allowing new content, new players, and new models to emerge; it makes the real value of the Web increasingly irrelevant to information, but relevant to community. Like air and water, digital living is only noticed because of its absence, not because of its presence. We are seeing digital living become an anachronism, and the new topics people are excitedly talking about are big data, the Internet of Things, new energy sources, artificial intelligence (AI), life sciences, space exploration, and so on. Computers and mobile devices are becoming increasingly tasteless as they are gradually eclipsed by other possibilities, such as self-cleaning shirts, driverless cars, service robots, smart doorknobs, and even a pill that gives you an instant grasp of English language. In Negroponte’s words, we will live in computers, wear them on our bodies, and even feed on them. An English proverb goes like this, “An apple a day will keep the doctor away.” In the future we might say, “An Apple (Apple Computer) a day will keep the doctor away.” From this point of view, the digital revolution is over. When the Publishing House of Electronics Industry decided to republish the book that led China into the Internet era, I invited the author to write a few words for Chinese readers. So Negroponte prefaced the book with the title “Been Digital,” which can be derived as “after being digital.” In the post-digital era, the digital revolution is no longer novel, and we will witness other truly amazing changes, such as how we manage ourselves together on this planet. But hold on. Consider the phrase “horseless carriage,” which was used when the automobile was first invented. Like a horse with a blindfold on its eyes, the inventor of the automobile could not have foreseen the

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dramatic changes the automobile would bring to people’s work and lives, including how we would build and utilize cities with automobiles, or how we would acquire new business models and create derivative businesses. It is hard to imagine, for example, the fault-free insurance for automobiles in the days of driving horses and carriages. As Marshall McLuhan says, “We look at the present through a rear-view mirror. We march backwards into the future.”1 We have a similar blindness today, because we cannot imagine a world where our sense of identity and community truly coexist in both the real and virtual realms. When climbing mountains, the higher the altitude, the thinner the air. But today we didn’t really experience “oxygen deprivation” because we have not reached the summit of the digital world, or even the “digital” base camp at the bottom of the mountain. This is where I find the paradox of today’s digital life—there are countless people who care about digital business today, but conversely there are few concerned to address the fundamental issues of digital society. The fundamental issues that need to be solved are overwhelming, such as the conflict between individual privacy and social openness, security and freedom, government surveillance and individual autonomy, and thriving creativity and protecting intellectual property. In this sense, the digital revolution still has a long way to go, or rather, the problem of “been digital” is tougher than “being digital.” I summarize these conflicts as a clash between the old regime and the great digital revolution, attributable to the fact that the Internet has finally arrived at the level of social arrangements or institutional forms from the level of tools or practices. One of the important institutional forms is called organizational management. We are managing the business of the information age in the same way we used for the industrial age; in other words, we are walking toward the bit world with an “atomic mindset.” To use an analogy, our organizations are like fish dying on the deck, gasping for air because we have arrived at a very different place in the digital world; most organizations are formed and developed from the atomic world, not the bit world. The world is going digital, yet the legacy of “atomic mindset” continues to erupt with pathological symptoms. Newspapers imagine that paper is part of their nature, telecom companies imagine that charges 1 Marshall McLuhan, Quentin Fiore. The Medium Is the Massage: An Inventory of Effects. Co-ordinated by Jerome Agel, Bantam Books. 1967. 74–75.

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should be proportional to transmission distance, and countries imagine that physical territorial boundaries are essential. All these imaginings are actually pathological. 1.2

When Atoms and Bits Become One

A common pathology in manufacturing is the stubborn imagination that hardware and software are separate. But why cannot we make atoms and bits integrated? Why not completely break down the wall between the digital and physical worlds, transforming data into objects and objects into data? When atoms and bits become one, that is when we will have the era of “personal fabrication,” or what we might call “social manufacturing.” Individuals and communities can use machines that integrate consumer electronics and industrial machine tools (perhaps called personal fabrication machines) to design and produce our own things in our homes or in our communities. Assuming I have completed my own personalized design, how can I turn it into a product? It can be printed at home or in a communal production facility using a 3D printer. 3D printing brings about “additive manufacturing,” the opposite of traditional production methods based on material processing. In the past, excess material was removed by using powered mechanical tools to shape the model. This process was clumsy, complex, time-consuming, and labor-intensive. In additive manufacturing, based on 3D CAD model data, we can construct objects by printing layer by layer using an adhesive material such as powdered metal or plastic. This is a process of adding material, not reducing it. In this way, objects can be created without any tools or fixtures, without creating scrap, and without investing more costs as complexity increases. Today, 3D printers are already being used to make medical devices, medical implants, jewelry, and even clothing. The cheapest 3D printers that can print only the most basic objects sell for $500–$1000, and it will not be long before we have printers that can print toys and household items at that price. By the end of the 2020s, 3D printers will be available on a small scale for use in some of the formerly labor-intensive industries. Within the next decade, printing electronics and construction materials with 3D printers should no longer be a fantasy. Consumers can buy their own 3D printers, and companies can offer 3D printing services, but it is the latter that is more attractive. Either way, 3D printing as a service embraces a wide range of growth prospects.

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As materials science advances, we will deliver products that are stronger, lighter, more energy efficient, and more durable. And nanotechnology—“molecular manufacturing”—will constitute the holy grail of manufacturing, where nanostructures with novel molecular organization can be created at the molecular level, atom by atom. Nanostructured materials will exhibit novel and significantly improved physical, chemical, and biological properties, leading to unlimited possibilities for creating new things. Major improvements in material properties and changes in manufacturing paradigms will trigger another industrial revolution. In this industrial revolution, today’s assembly line operations will have no place. On the production line, the next generation of robots will soon show the cost advantage over manual labor. The world’s most advanced car, the Tesla Model S, is made in Silicon Valley, one of the most expensive areas for real estate in the United States, and Tesla can afford it precisely because of the robots used on its production lines. Foxconn, one of China’s largest manufacturers, has announced its own “Million Robots Program,” which is designed to take over the “3D” jobs—the dirty, dangerous, and dull jobs—from its employees. While the program is not moving as fast as expected, Foxconn says it has the capacity to produce about 10,000 Foxbot robots a year and is aiming to automate 30% of its Chinese factories by 2020.2 Robots, specialized motor devices controlled by software and remote controls, can now perform a wide variety of tasks, including moving goods, helping the elderly with household chores, participating in surgical procedures, milking cows, and even military reconnaissance and strikes. And, through open-source communities and off-the-shelf robot development tools, people can manually assemble robots on their own or develop applications for these robots. Another technology that exerts a major impact on manufacturing is AI. In a new phase of development, AI is beginning to support a variety of technologies. After the chess grandmaster Garry Kasparov was defeated by IBM’s Deep Blue computer in 1997, the human winner of the American quiz show Jeopardy was defeated by IBM’s Watson supercomputer in 2011. Driverless cars are unthinkable without AI, so are Apple’s Siri, Microsoft’s Xiaoice, and Facebook’s face recognition software.

2 Foxconn Sets Out Three-step Plan for Robots to Almost Completely Replace Workers. huanqiu.com. https://tech.huanqiu.com/article/9CaKrnJZuDB. Dec. 31, 2016.

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AI technology is entering manufacturing, allowing us to design our own products at home with the attentive service of AI design assistants. In factories, AI programs not only automate tasks, but also enable entirely new business processes, such as customizing product configurations to meet individual customer needs. Today, AI provides manufacturing companies with solutions for visual inspection, automated control, intelligent calibration, and root cause analysis of problems. Of course, machines will partially replace human work, which is also a kind of intelligent automation. The use of robotics, cheap energy, and the industrial trend of product manufacturing and technology development becoming interdependent are taking up the baton to drive this new change in manufacturing today. Information, energy saving, new energy, and high-value-added advanced manufacturing are at the forefront of the industrial expansion. The manufacturing industry has gone through the process of negation of negation during these years. Nowadays, manufacturing without networking is like producing a pile of useless scrap metal, destined to fail to keep pace with the times. The new generation of intelligent manufacturing and rapid response technology has lowered the threshold of product design and manufacturing, and has become the winning formula to seize the market by virtue of rapid and effective response to the market. New digital and intelligent technologies make anything manufacturable and possible to be manufactured anywhere. In this transformation, the place of manufacture is no longer the factory (which is a relic of the twentieth century), but people’s home, or the community where people gathered together. This will have such a profound impact that it will change the nature of work, the nature of money, and even the nature of the economy as a whole. Further, it will change people themselves. Imagine a “personal fabrication machine” capable of making anything, even replicating itself. What would happen if an automated factory system with this machine is completely free from human control? This is precisely the haunting scene depicted in the novel Autofac (1955) by Science fiction writer Philip K. Dick. What is important is that Dick introduced the concept of entropy and linked it to the post-scarcity problem. Automated factories helped humans reach a stage where they wanted for nothing, but locked innovation in their progress. Automated factories cannot develop new products, but only insist that everything must conform to a design drawing or

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recipe. They fix humans in one position forever, or at least until the environmental crisis makes what is left of civilization disappear. Since the time when the Autofac was published, Dick’s topic has been pondered by humans for more than 60 years. The topic is: Which is more human, the man-made robot, or the man who made the robot? 1.3

Will Computers Become the Next Form of Life

Currently, the development of biological intelligence has been at the mercy of the forces of natural evolution. However, when we gain control over the molecular structures that determine our physical and mental characteristics, it will be possible to modify existing organisms and even invent new ones. At that point, it will be possible to “grow” brains on order through molecular engineering, gradually blurring the distinction between natural intelligence and AI until it disappears. In the age of biotechnology, we will achieve the integration of genetics and computers. On the one hand, computers will enter the human body, but instead of being an external patch like pacemakers and hearing aids, they will be absorbed into the body like cells through microtechnology and become part of our body. On the other hand, we will pass on more and more of the qualities of organic “life” to what we currently identify as inorganic matter. The development of AI may well mean that humans will transfer their intellectual supremacy to thinking machines. There is an influential opinion among scientists—neither mind nor life need be limited to organic matter. Of course, no one presumes to assert that this matter will soon gain feasibility. But cannot we believe that after another million or billion years, or a trillion years of scientific research, the above possibility will become a reality? The history of science is, after all, only a few hundred years, and after a long future phase of innovation, it seems inevitable that machines can do, and be more likely to do better, anything that human can do. In fact, this is already happening in a limited sense. The line between carbon and silicon is getting blurred. Carbon-based organics will function like semiconductors, while silicon-based inorganics will have biological brain functions. Will computers become the next form of life? Some people believe yes. Dr. Robert Jastrow, a researcher in intelligent evolution, concludes, “The Earth is reaching the end of its carbon-chemical life epoch and is

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now kicking off a new era of silicon-based life - indestructible, immortal, and infinitely extensible.”3 Note the so-called extensibility here. When microelectronics evolves to a certain point, you will get a set of interchangeable organs connected by artificial nerves that nest well with each other. At the junction of these electronic organs with your sensory receivers and muscles, a constant stream of bits passes between the fissures of carbon and silicon. At where they are connected to the external digital world, your nervous system is connected to the global digital network. And you will become a cyborg constructed from standard parts that can be reset, with infinite extendibility. You can imagine that as these electronic organs become increasingly miniaturized and more closely connected to you, they will shed their traditional hard plastic shells. They will become more like clothing— perhaps soft wearables that fit the contours of your body, or be made to fit like shoes, gloves, contact lenses, and hearing aids. Circuits could be woven into the grain of cloth, and microelectronic devices could even be surgically transplanted. But you do not have to own the electronic organs you are connected to, and they do not have to be close by you. Think of the simple oldfashioned telephone service, where you rent channels and connect distant devices when needed. As the density of nodes, bandwidth and geographic coverage of digital networks increases, and as different kinds of electronic organs are connected, similar principles will spread. We will all become cyborgs like Transformers, able to change our faces whenever and wherever we want or need—renting outstretched nerve fibers and organs and redeploying our spatial extensions to the extent that resources allow. What will you look like one night in the not-so-distant future? At that time, wearable, well-fitting, electronic organs implanted in your body will be connected by a body net that is as common as cotton. The infrastructure close to your body seamlessly connects you to the astronomical number of bits. Even your underwear has software in it. The smart pants tell you it is 11:00 p.m. Do you know where your cyber-extensions are that night?

3 Robert Jastrow. The Enchanted Loom: Mind in the Universe. Simon & Schuster. 1984.

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In the writing of William Gibson, the pathfinder of cyberpunk fiction, computer anti-heroes fade out of their slowed-down, aging, highmaintenance flesh as if nothing had happened, while transferring their soul software to new hardware that is constantly updated and iterated.4 Would resurrection be simplified like this to the point of recovery through backup? Religious believers would criticize such ideas as treacherous. Many are hesitant to entertain the idea of non-carbon life. How, they ask, could the ineffable qualities of the human race enter the computer? But those who believe in non-carbon life counter with a powerful rhetorical question: How can we accept the evolutionary perspective while insisting that evolution stops with us? Genetic technology endows us with an extraordinary ability to participate in our own evolution. So, it is not our ancestors who created us, but we who created our ancestors.

2

Mobile Megatrends and Social Change

Existing technologies are incredibly intimate and pervasive.

2.1

Is Facebook Overvalued?

On September 24, 2012, Facebook stock finished the day at $20.74, with a 9.1% decline, the biggest drop since July 27, 2012. Having priced its initial public offering at $38 per share in May 2012, Facebook has fallen 45% since then. This is an embarrassment for Mark Zuckerberg. Barron’s, the leading financial magazine in the United States, made a prediction that Facebook was overvalued and that a reasonable stock price would be $15.5 In fact, Facebook’s stock price experienced an uptick in early September 2012. On September 11, 2012, Zuckerberg told the TechCrunch Disrupt Conference in San Francisco that the company was taking steps to capture mobile advertising revenue and build its 4 See, for example, John Semley. Cyberpunk Is Dead. https://thebaffler.com/salvos/ cyberpunk-is-dead-semley. Nov. 2019. 5 Andrew Bary. Still Too Pricey. Barron’s. Sep. 24, 2012.

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own search capabilities. The next day, Facebook stock jumped 7.7%.6 However, Facebook’s share of the $2.061 billion US mobile advertising market was only 2.8%, ranking sixth. By contrast, Google, which ranks first, has more than half of the market share.7 Investors believe that Facebook has been too slow to make the shift to mobile while a large number of its users no longer access the site through their computer desktops and instead use mobile devices. Exactly how much advertising revenue it can generate on mobile devices is something that investors are very worried about Facebook. After a period of rapid growth, Facebook’s active mobile users surpassed half of its overall users in Q4 2011.8 This was a very important milestone and was great news for Facebook’s long-term future. But for short-term operations, it was very bad news, because Facebook mobile did not set any advertising space. So, in terms of average revenue per user (ARPU), Facebook’s revenue has stagnated significantly since Q4 2011 as it grew in the mobile field, which was a warning sign for financial performance.9 In other words, the market was taking a stand: since Facebook has moved more than half of its users to mobile, it had to prove that it could guarantee a profit model as good as that on the World Wide Web (Web) for mobile; otherwise, the company would have a worrying prospect. In April 2012, Facebook did something that many people thought was crazy at the time before it went public. It paid $1 billion in cash and stock to acquire Instagram.10 Instagram is a photo-based app that allows you to snap photos and share them to social networking sites with one click, 6 Jessica Guynn. Facebook Stock Jumps 7.7% After CEO Mark Zuckerberg’s Comments. Los Angeles Times. https://www.latimes.com/business/la-xpm-2012-sep-12la-fi-facebook-bump-20120913-story.html. Sep. 12, 2012. 7 Facebook Sinks After Barron’s Says Stock Only Worth U.S. $15. Bloomberg News. Sep. 24, 2012. 8 Tomio Geron. Facebook’s $5 Billion IPO Filing: $3.7 Billion in 2011 Revenue. Forbes. https://www.forbes.com/sites/tomiogeron/2012/02/01/facebooks-5billion-ipo-filing-3-7-billion-in-2011-revenue/#2afb70d631a8. Feb. 1, 2012. 9 Emil Protalinski. Facebook Sets IPO Share Price at $38: $104 Billion Valuation. ZDNet. https://www.zdnet.com/article/facebook-sets-ipo-share-price-at-38V104-billionvaluation/. May 17, 2012. 10 Dominic Rushe. Facebook Announces $1bn Purchase of Mobile Photo Network Instagram. The Guardian. https://www.theguardian.com/technology/2012/apr/09/fac ebook-buys-instagram-mobile-photo. Apr. 9, 2012.

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supporting both iOS and Android. But as Apple’s App of the Year it is not profitable.11 What prompted Zuckerberg to splash the cash on such a simple app? There is precedent for this approach by Facebook—a big company buying innovative up-and-coming companies at a high price. In 2002, eBay acquired PayPal for $1.5 billion in what proved to be a very successful deal. PayPal as an offshoot of eBay brings in revenue comparable to that of eBay’s merchandise auction business. In 2006, Google acquired YouTube for $1.65 billion at a time when its future was bleak. Looking back today, was Google’s investment a right decision? Of course it was, because YouTube now is way ahead of all the video sites and with the shift in online advertising, YouTube turned into an extremely important online platform for Google. Judging from these success stories of high-tech companies acquiring innovative companies, Zuckerberg’s logic makes sense. It is a strategy of killing two birds with one stone—both to acquire a valuable strategic asset and to deter its competitors. The entire high-tech industry contains a very different competitive logic than traditional industries, and even the largest companies face a very high probability of death if they lose ground in one place. Many new companies are waiting for the opportunity to attack the “soft underbelly” of these large companies, and if the large ones sit back and do nothing, they may die under the knife of these young ones. So the big companies have a certain lingering anxiety about the newcomers— they can either eat these new players and make them part of their own, or they can sit back and watch other companies eat these latecomers, leaving themselves with a huge obstacle in the competition. Therefore, it is the business logic of Silicon Valley that large companies must not only develop new businesses, but also capture new business models as they sprout. 2.2

The Web Is Dead: Long Live the Internet

Why did Facebook invest in Instagram? Because Instagram meets Facebook’s two urgent needs. The first is the need for the photo business. From the data, the 900 million active users of Facebook at that time 11 Pete Pachal. Instagram Rockets to No. 1 in App Store in Wake of Facebook Deal. Mashable. https://mashable.com/2012/04/11/instagram-top-app-store/. Apr. 11, 2012.

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uploaded 300 million pictures every day,12 which is an extremely large number. The second is the demand for mobile applications. There is a world of difference between whether a user uses photos on a mobile device or on a computer desktop. When you are on vacation in Bali, for example, you definitely want to take pictures on the beach and share them with friends and family right away, rather than going back to your room and sorting them out on the computer before sharing them. At a time when the user’s need to use Facebook on mobile devices was growing, Facebook met Instagram, an app that had a very clear shortterm business appeal and captured such a large user base, and aimed to take it on board. This reveals Zuckerberg’s early insight into the megatrend of mobile applications. Although investors had some doubts about the implementation of Facebook’s mobile strategy, Zuckerberg perceived early that Facebook must enter the mobile field to continue its strong growth momentum; otherwise, not only would the whole business stagnate, but the company would even face a crisis of survival, because the whole industry had entered a huge technological change. In August 2010, Wired, a leading US tech magazine, made a startling proposition: “The Web is dead. Long live the Internet.”13 The dramatic shift in the entire digital world represents a shift from an open World Wide Web to a semi-closed platform over the past few years. We know how Apple succeeded. This semi-closed platform allows users to transfer data over the Internet without the need for a browser. This shift has caused the traditional World Wide Web platforms built with Hypertext Markup Language (HTML) to be bypassed, and in many cases abandoned, by users. That is why Wired says the Internet is still alive and well as a larger concept, while the World Wide Web is in jeopardy because of the challenges mobile poses to it. Google, the giant of the World Wide Web, recognized that the situation had changed and went to such lengths to develop Android, even acquiring Motorola. Microsoft’s alliance with Nokia is also due to Apple’s rewriting of the industry landscape. All these actions are to comply with the larger technological changes. Some years ago, one could still 12 OECD. OECD Internet Economy Outlook 2012. OECD Publishing. https://www. oecd-ilibrary.org/science-and-technology/oecd-internet-economy-outlook-2012_9789264 086463-en. 2012. 13 Chris Anderson, Michael Wolff. The Web Is Dead. Long Live the Internet. Wired. https://www.wired.com/2010/08/f-webrip/. Aug. 17, 2010.

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say that the main purpose of using a cell phone was to call or text someone anytime, anywhere; however, with the popularity of smartphones, a significant number of users no longer use them just for these two needs. Smartphones carry a very large number of applications that are entirely based on the phone itself and do not have any relationship with the computer network, such as Instagram that exists entirely only in the mobile device. This is a reflection of the rise of the App economy, which represents a very different future. The iPhone App Store opens up a new era that will revolutionize the way we interact. In terms of the whole computing trend, in the past the center of computing was the desktop, so software ran like a typewriter. Now, on the other hand, technology is more intimate and pervasive than ever imagined, and the always-on app environment has forced developers to reimagine new interfaces and new experiences. Investors immediately get a glimpse of where profitability is headed from these actions by developers. In 2011, US venture capital firms invested 10% of their money in mobile apps, and 12% of deals were mobile-related. According to Ben Lerer, head of Lerer Ventures, if a company has both a mobile business and a World Wide Web business, the company will have investors hesitating. The reason is simple: if your company was originally engaged in Web-based services, then your business transfer may involve huge switching costs. However, if you start with mobile services without historical legacy, investors will instead find such a company more promising.14 At the same time, apps designed for specific mobile devices are much faster to use than websites. That is how the mobile Internet trumps the World Wide Web, winning with immediacy. By the end of 2012, the mobile Internet had accounted for 15% of all Internet traffic, and the number of smartphones owned worldwide exceeded 1 billion. “Mobile first” has become the inevitable development direction of social networks. At this point, it dawned on people: Why would Facebook put a heavy bet on Instagram? Because at that time, Facebook was a World Wide Web giant, but not a mobile giant, and it needed to adapt to a time 14 Jenna Wortham. A Billion-Dollar Turning Point for Mobile Apps. The New York Times. https://www.nytimes.com/2012/04/11/technology/instagram-deal-is-bil lion-dolar-move-toward-celphone-from-pc.html. Apr. 10, 2012.

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when the old rules were being reshaped. Yet we know that acquisition strategies are inherently risky, and acquiring startups does not necessarily lead to success. For example, the online photo service Flickr had a huge market in the United States, but after Yahoo acquired it, Yahoo failed to take full advantage of Flickr’s strengths in social and mobile, and lost out to later competitors in both areas. Instead of revenue, Flickr brought Yahoo tens of millions of dollars in annual losses. This is a classic case of a large company trying to reinvent itself by gobbling up a smaller one, but getting lost in wasting something of real value. At Yahoo, the change of executives is like a merry-go-round, and the company has been struggling in a precarious state, which finally dragged the company into a dilemma with no direction.15 In another classic case, Rupert Murdoch paid $580 million for MySpace in 2005, only to sell the social networking site to an advertising agency six years later for a mere $35 million.16 It was a spectacular failure for Murdoch, as MySpace was second only to Facebook in terms of reputation, activity, and users at the time of the purchase. The cases of Flickr and MySpace show us how huge the stakes are in the Internet industry. Overall, the many failed acquisitions were accompanied by a few successes, such as the previously mentioned Facebook acquisition of Instagram. The reason Facebook made such a big bet before going public was that mobile was moving to the center of people’s lives, with mobility becoming a core ingredient of our lives, and cell phones turning into tools for rapid communication and group participation. Moreover, this trend now is more obvious among young people. In the past few years, smartphones have been equipped with sensing devices such as GPS, accelerometers, gyroscopes, microphones, cameras, and Bluetooth devices. It may not be clear to you why so many sensors are built into your phone, but think about how WeChat enables shake, and why you can watch movies more comfortably in landscape on your phone. All of these features are made possible thanks to devices like accelerometers and gyroscopes. Sensors and their applications have 15 Yahoo Lost Its Internet Empire by Killing Flickr It Acquired. https://36kr.com/p/ 5110662. Jan. 2, 2018. 16 Dominic Rushe. MySpace Sold for $35m in Spectacular Fall from $12bn Heyday. The Guardian. https://www.theguardian.com/technology/2011/jun/30/myspace-sold35-million-news. June 30, 2011.

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enabled smartphones to achieve unprecedented popularity. The implantation of these sensors has also taken the cell phone beyond the realm of communication tools and brought it closer and closer to being an entertainment center and sometimes an efficient productivity tool. 2.3

Mobile Computing for Contextual Awareness

Big data has become a popular concept due to the ubiquity of cell phones and the massive amount of data generated through sensors and applications in cell phones. As we take large-scale mobile data as inputs, we can define and understand real-life phenomena such as personal traits, human mobility, and patterns of communication and interaction through these inputs and then observe their outputs. The cell phone is the tool that follows the user most constantly among all human inventions; many people carry it with them wherever they go, and the data it generates records their activities, their interactions with others, and their transactions. In view of all these, it can be said that what the phone records are the human life itself. For example, where a user frequents is a pretty important issue in mobile computing, and much meaning can be inferred from it. The places we visit reflect our tastes and lifestyles, and shape our social relationships. Mobile computing gives some semantic meaning to the places that a user frequents. Each place can be interpreted in terms of the user’s activity history over time, and with the addition of other contextual information perceived by the user’s smartphone, it is possible to generate many new service needs. Here, different input information generates different values. For example, location is not seen to be more important than visit frequency. In industries such as real estate, retail, and advertising, location is so important that they put forward the slogan: “The three most important elements for us are location, location, and location.” However, since mobile apps began providing data, we have found that there is more gold to be mined. For example, the more times a person visits a place, the more important that place is to him. So can we create some kind of customized media or advertising based on the visit frequency? Mobile computing is a form of context-aware computing that is always relevant to the context in which you are. Cell phones carry a variety of sensors that allow them to capture all types of information, from pictures to video to sound, in the context around them, anywhere, anytime. So,

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the whole computing experience it brings is very different from that brought by computers. 2.4

Behavioral Science from the Perspective of Big Data

Today, all the elements, such as the perception of location, the management of identity, the collection of information from cell phones, and the social network connections of users, have not yet been fully integrated. However, we can imagine that if one day all these elements are fully interconnected and interoperable, more interesting services will be born— based on the user’s needs, their past activities, where they are, and even what they are doing. Human interaction thus enters a whole new world. In addition to people, things are being connected to each other—the Internet of Things. And from the Internet of Things, we will further enter the era of the Internet of Everything. Today, more than 99% of the physical world is still not connected to the Internet. The Internet of Everything will awaken everything you can imagine. Through the use of micro-sensors on the network, everyday objects will be able to connect to the Internet and become intelligent. By 2020, 37 billion smart things will be connected to the Internet, gaining context-awareness, as well as enhanced processing power and better sensing capabilities.17 This prospect presents us with a whole new topic of how to use massive amounts of data. We are entering the era of big data, but big data is defined not by the sheer size of the data (it is now generally accepted that the order of magnitude of big data should be “terabytes”), but by the sheer capacity of humans to analyze and use it. This capacity can not only turn all human activities into data, but also deeply integrate, analyze, mine, and process the data input into the system, and find some psychological and social patterns from the data, so as to realize the ultimate value. Many people are excited about this prospect. Among them is a group of computer scientists. They suddenly found such a wonderful prospect in front of their eyes—human beings have acquired a very high level of information processing capability. This suddenly available data is a treasure for computer scientists, and they can use a variety of ways to “play” with the 17 Dave Evans. The Internet of Everything: How More Relevant and Valuable Connections Will Change the World. https://www.cisco.com/c/dam/global/en_my/assets/cis coinnovate/pdfs/IoE.pdf. 2012.

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data. Another group of people who are excited about this is social scientists. Unlike the natural sciences such as physics and mathematics, social science studies human behavior that does not usually follow a strict law, just as it is difficult to summarize the “law of gravity” regarding human behavior. So, social scientists had tried to analyze what is going on in the human brain and what people really need through surveys. But all they employed were the traditional ways and methods. Social scientists suddenly realized that we had come to a day when people’s data was in front of them, and all they had to do was apply some kind of analysis of what form the data could take. This is a “paradise” that social scientists have never imagined. The combination of these two sciences in the context of big data could lead to what I call a “behavioral science in the context of big data.” This behavioral science has many implications, for example, we can analyze politics, society, psychology, and so on. However, when we use this science to analyze consumption, we gain the opportunity to fully understand human consumption behavior not only in space, but also in time. By gaining insight into the natural patterns of consumers (what they tend to do) through consumption behavior over long periods of time, marketers gain a dynamic contextual orientation and perception of consumers (what they tend to do at what time), and thus can anticipate the behaviors consumers are likely to perform (what they are likely to do). Most importantly, they are able to recognize what actions to take to influence all consumers. So, mobile marketing and mobile advertising embrace a particularly bright future. Of course, privacy will be a big issue: revealing too much information about your social activities with friends makes your friends feel betrayed to data companies; the publication of data about interests shows your personal preferences like a commercial show; and the leakage of behavioral data endangers personal safety. Eventually, the massive display of personal information makes your thoughts visible. However, from the history of new technology in society, people often sacrifice privacy for convenience and fun. Robin Li, chairman of Baidu, said that Chinese users are more open when it comes to personal privacy and are to some extent willing to trade privacy for convenience and efficiency. Although this statement immediately drew a tidal wave of public opinion, in a sense, he was telling the truth.

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3

The Pitfalls of Big Data18

History cannot reveal the future, but the context is the key.

In 2014, Li Na won her second Grand Slam, breaking the Chinese Grand Slam record set by Zhang Depei, and Chinese people rejoiced at the miracle created under the non-nationwide system. As we summarize the factors that contributed to Li Na’s success, we again saw the statement: “it was big data that played an important role.” As early as during the US Open in 2013, it was disclosed in the media that the era of big data deeply involved in the event and disrupting sports had come. But after carefully reading the relevant materials, we found that the role of big data is only confined to the periphery of the event, such as the spectator experience. It is not easy to conclude that big data plays a significant role in improving the players’ own game. The most plausible explanation for Li Na’s win is that she was helped by Carlos Rodriguez to significantly improve her mental game. It can be said that Li Na has the heart of a champion by addressing her problem of rhythm very well throughout the match while leading her opponent in technical aspects. The big data that is being talked about is nothing but telling the players some not so specific technical indicators. In the individual athletic competition, the contest between the masters in the psychological quality is far more important than the technical competition; otherwise, there would be no such metaphor as “black swans.” It can be said that the greatest charm of the sporting competition lies in those unpredictable “black swans.” On September 6, 2012, Chinese player Li Na, representing the highest level of Asian tennis, faced Serena Williams in the United States. At that time, IBM developed a match-winning strategy for the players after combining all the match data from the last 8 years of the US Open. The key to winning on Li Na’s side included three strategies: (1) a first serve percentage of more than 69%; (2) a score percentage of more than 48% in 4–9 shot; and (3) a score percentage of more than 67% when serving for 30:30 or 40:40. The match ended with Li Na’s rout. After the match, IBM announced in a high profile that Li Na had completed only one of the three winning 18 Co-authored with Hao Yazhou.

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strategies, while Serena Williams had completed two of her three winning strategies. So, many people went along with IBM’s thinking and asked: Why did not Li Na play according to IBM’s strategies? 3.1

Subjectively Acquired Signals and Noises

In The Signal and the Noise: Why So Many Predictions Fail-but Some Don’t (2012), renowned American blogger Nate Silver makes the proposition that data is a signal that will help us in the future, or meaningless noise? Silver became famous during Barack Obama’s presidential campaign. At the time, Obama and Mitt Romney were locked in a tight race, and it was impossible to see who was likely to win. Silver used baseball statistics to conclude that Obama would win. This accurate prediction made him celebrated. However, Silver soon began to reflect on the fact that there were far fewer successful predictions using big data than unsuccessful ones. Why did the US government ignore information that suggested a terrorist attack would occur before 9/11, as it did at Pearl Harbor? Why cannot economists with a lot of data predict economic crises? Why scouts still have not been replaced by data in Major League Baseball? Silver writes in his book, “Our world has experienced too much since the printing press. Information is no longer a scarce commodity. We have so much information, even so much that we are overwhelmed, but very little of it is usable. We view information subjectively and selectively, but do not pay enough attention to the misinterpretations that result from doing so. We think we need information, but in fact what we really need is knowledge.”19 Silver’s words have made it clear that the subjective will of the person is the key factor in deciding whether to see the signal or hear the noise. The US intelligence community does not use correlation thinking to connect the dots when it receives signals that foretell an imminent terrorist attack on the country. In 2010, a Democratic congressman called Silver and asked him if he could keep his seat. Silver told the congressman, “You have a 99% chance, and you should donate your campaign funds to relatively disadvantaged Democratic districts.” However, the congressman was not willing to help another congressman in order to hedge the 1% 19 SILVER N. The signal and the noise: why so many predictions fail but some don’t. Penguin, 2012:17.

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risk. When the subjective desire of the person is not positive, big data is nothing but noise to them. Likewise, the subjective desire can cloud the data with a certain amount of deception. In the film God of Gamblers, Chow Yun-Fat’s character, the God of Gamblers, has a habit of twirling his ring. The opponent discovers this action by watching a lot of video and determines that when the God of Gamblers twirls his ring, it is the time for him to cheat. As a result, in a battle to the death, the God of Gamblers deceived everyone: he did not cheat after twirling the ring, resulting in his opponent’s collapse. To summarize with today’s point of view, the opponent overemphasized direct causality in his data analysis, and variables were missing from the model. This biggest variable is the mental state of the person in battle. This is what Silver has repeatedly emphasized. Silver is a well-known baseball statistics expert in the United States, and he built the PECOTA system, which is considered to be the most authoritative statistical tool for baseball games. Right after the book Moneyball: The Art of Winning an Unfair Game (Michael Lewis, 2003) became a huge hit in the United States, the scouting profession was at a low ebb and teams were madly obsessed with statistics. However, Silver argues that scouting has proven to beat data in the end. Data systems rely on historical data for their judgments, while scouts rely on fielding judgments in addition to historical data. Silver cites the example of Red Sox star Dustin Luis Pedroia. He said the data system told him that Pedroia would be a promising star. It happened just as Silver expected, but as he got closer to Pedroia, he realized that Pedroia’s strong belief and focus were the keys to his great play on the field. And both of these are things that data systems cannot perceive. 3.2

History cannot Reveal the Future

Back to IBM’s winning strategy for Grand Slam players. After talking with several senior tennis commentators in China, I found that people did not consider this so-called big data system to have practical value, except that they found it fun. First of all, this system cannot predict the future. Secondly, this kind of conclusion, which relies on historical data, has already been well known by the players’ coaching team. For Li Na, the coaching staff’s task is not to tell her this data so she can target her training, but to focus on psychological counseling.

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Moreover, two major factors are needed to support Li Na to reach the three targets set by IBM. The first is Li Na’s mental state on the battle. Playing tennis is not like playing chess, you may not be able to do what you think. Secondly, it lies in the level of pressure from the opponent. Facing a power player like Serena Williams, Li Na’s space to play will be greatly compressed. And these two major factors are closely linked together. We are often misled to believe that the role of big data is to allow history to reveal the future. Actually, it does not. Even in areas like tennis match, historical data can often be a trap. Big data is as big as the size of the original database, but even bigger because of the volume of real-time data flows and the wide range of data sources. As Silver notes, a good baseball prediction system must have three major elements: consideration of the externalities of player performance; a differentiated view of luck and technical factors; and an understanding of the relationship between player performance and age. Interestingly, in another women’s tennis match, a player did two of the three strategies IBM had developed for her, and she failed. The winning team, on the other hand, only accomplished one strategy. 3.3

Context is the Key

Based on the same reasoning, big data should not be deified in business management. The central principle of big data involves searching for correlations between operational data. The idea is simple and straightforward. With inexpensive cloud storage, we can now collect a dizzying array of data related to a variety of business processes, from the number of trucks arriving at a company’s loading dock, to the number of orders processed per minute on a given date and time, and to the number of customer complaints received on Monday. New powerful processors and scalable databases allow skilled operators to mine this data for patterns within the data, especially correlations between operational variables. By discovering these patterns, big data promises to expose complex relationships to resolve bottlenecks and improve daily operations. Ideally, we can assume that a whole new era of data-driven productivity is thus opened.

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The problem is that these correlations are often spurious. This makes it often necessary for data professionals to wave a magic wand to determine which big data relationships make sense and which are mere coincidences. To solve this problem, there is a simpler way to show correlations: incorporate “small data” with context. Context-awareness, or context, can make seemingly complex situations clear. Perhaps the simplest example of context is location. Google Instant is using your current location to provide highly relevant search suggestions, such as businesses within walking distance. Other forms of contextual information include people (e.g., people you work with) and time (e.g., overlapping schedules). One of the most useful types of context for an enterprise recommendation engine is subject matter, such as the header information of an email. Knowing what an employee is currently most concerned about, the recommendation engine can suggest emails, documents, and business deals related to those topics. Obviously, using email as an anchor for context eliminates recommendations for irrelevant content because the data tool will realize that the content is completely irrelevant to what is in your mind. Of course, here’s just an example about email. A chat session or customer relationship management record can do the same thing. The four key types of data needed to perform contextual computing are social, interest, behavioral, and personal. Some of these four types are well established, while others have only become popular in the last few years. Players who are comfortable mastering and using these four types of data will have a great advantage in competing in the Internet industry. Social: Social data reveals how you connect with other people and how they connect with each other. It also reveals the nature and emotional relevance of those connections. In an ideal state of contextual computing, the nudge of software and services can connect two strangers who are in the same place at the same time and can get along. However, all the social data in the world is useless if you know very little about someone’s activities and interests. Interest: A person’s tastes and preferences are largely organized around mutually relevant topics. It also correlates with overlapping tastes between individuals whose lives are very similar to your own. But interest mapping cannot read which new direction your curiosity might lead you in, nor can it do anything to effectively recommend your favorite restaurants or vacation spots based on what you have read.

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Behavioral: This is the data that is most likely to be easily captured. Behavioral data can easily describe what you actually do, rather than what you claim to do. Sensors can do the job, as can self-reporting mechanisms. This data can be contrasted with interest data in two ways, thus allowing the computer (perhaps better than you) to figure out the likelihood of what you will do next. The behavioral data in a way provides the basis for Google search, Netflix suggestions, Amazon recommendations, iTunesGenius, Nike + run tracking, FourSquare, FitBit, and the whole quantified self-movement. When this data is combined with the other three types, real insights are possible. Personal: This is the set of data that relates to a person’s deepest beliefs, core values and personality. It is what makes a person unique in the world, just as social data helps show what makes a person similar to others. Given that psychology still struggles to explain exactly how our personal identity works, it is not surprising that the process of recording such information in computable form is so slow. Having data on one big item alone does not allow for reliable conclusions to be drawn and perfect contextual calculations to be made. Therefore, it is important to have the right attitude toward big data, neither to ignore its value nor to worship it as a god.

Heraclitus’ Law

4

An extremely important law in the Internet industry, which also constitutes the industrial background for the rise of platforms, is called “winner takes all”. However, according to Heraclitus’ law, the leader of one era will not lead the next.

4.1

Winner Takes All

In 2013, the Oxford Internet Institute made an infographic on the Age of Internet Empire, which rated the most popular websites in the world, with Google being the rightful leader, followed by Facebook. By country,

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Google is the most visited website in 62 countries, and Facebook is the most visited website in 50 countries.20 In 2019, when the mobile Internet is on the rise, ranking social networks by site traffic (desktop and mobile), Facebook is the most powerful in terms of global social network usage distribution (currently 2.45 billion monthly active users), topping 153 of the 167 countries (92% of the world) analyzed; the two remaining bastions it cannot overcome are China and Russia.21 Further analysis of global social mobile applications shows that while Facebook is the world’s premier website, this is not the case when it comes to app usage. In fact, Facebook is the leader in only four countries (regions): the United States, France, Sweden, and Vietnam. In all other parts of the world, it actually faces “friendly” competition from WhatsApp and Facebook Messenger, although they are both part of Zuckerberg’s ecosystem. WhatsApp, with 1.5 billion monthly active users, is the leader in 32 countries, with great success in Italy, Germany, the UK, Spain, Russia, throughout South America, India, and Saudi Arabia. Also growing rapidly is Facebook Messenger, spun off from the largest social network, Facebook, which now has 1.3 billion active monthly users and is ranked number one in Canada, Australia, and some countries in the Eastern European region. The Facebook system has four global competitors: WeChat, which dominates the Greater China region with more than 1 billion monthly active users; Line, which has 200 million monthly active users and occupies the markets of Japan, Thailand, and Taiwan; Viber, which leads in Ukraine and Croatia; and KakaoTalk, standing alone in South Korea.22 What must be acknowledged, however, in both the World Wide Web era and the mobile Internet era, is that the United States is the leading innovator in the global Internet. Let us use a pizza as a metaphor for the basic development of the Internet right now. The crust that serves as the 20 Robinson Meyer. Age of Internet Empires: One Map with Each Country’s Favorite

Website. The Atlantic. https://www.theatlantic.com/technology/archive/2013/10/ageof-internet-empires-one-map-with-each-countrys-favorite-website/280287/. Oct. 4, 2013. 21 Vincenzo Cosenza. World Maps of Social Networks. https://vincos.it/world-mapof-social-networks/. Jan. 2019. 22 Vincenzo Cosenza. World Maps of Social Apps. https://vincos.it/world-map-of-soc ial-apps/. Jan. 2018.

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bottom layer is made in the United States, and the toppings are from all over the world. When we come to “American crust,” we inevitably talk about the five major American platform companies—Apple, Microsoft, Google, Amazon, and Facebook (there is an ugly acronym FAMGA to describe these five companies). In 2011 the combined market capitalization of these five companies was $945 billion; by 2014 it had almost doubled to $1.8 trillion; and in 2017 the combined market capitalization of FAMGA reached $2.8 trillion. You can imagine how powerful these five companies are sweeping the world.23 At the end of 2017 Q1, the top five publicly traded companies in the world by market capitalization were all Internet platform companies, with the exception of Warren Buffett’s portfolio company. And the top five platform companies left the next technology companies far behind. In sixth place is Oracle, whose market value accounts for only 45% of Facebook’s market value.24 In other words, in the technology industry, we are facing a basic competitive scenario of “the top five platforms vs. the rest of the Internet companies”. The five major platforms span so-called old technologies (Windows is still king of the desktop and Google rules Web search) as well as new ones. Google and Apple control mobile operating systems (Android vs. iOS) and the apps that run on them; Facebook and Google control the Internet advertising business; Amazon, Microsoft, and Google control the cloud infrastructure that many startups run; Amazon’s shopping and logistics infrastructure is becoming the heart of the retail industry; and Facebook continues to amass greater power on the most basic platform—human social relations. Influenced by the network effect, consumers concentrate on large platforms for all their consumption needs because of the constrained time of use. As a result, an extremely important law seems to have developed in the Internet industry, which also constitutes the industrial background for the rise of platforms, namely “winner takes all”. 23 John Battelle. The Internet Big Five Is Now the World’s Big Five. https://battel emedia.com/archives/2017/05/the-internet-big-five-is-now-the-worlds-big-five. May 17, 2017. 24 Lou Kerner. The Profound Implications of Five Increasingly Dominant Tech Companies. https://medium.com/crypto-oracle/facebook-apple-microsoft-google-amazon-akafamga-is-eating-the-world-d3ba0c62df8b. Apr. 9, 2017.

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A “winner-takes-all” market is one in which the best performers are able to reap huge rewards, while the rest of the competitors are left with a few scraps. If the “winner-takes-all” market expands, so does the wealth gap, as a few people are able to earn more and more of the income that should be more widely distributed throughout the population. 4.2

Four Dimensions and Five Characteristics of Platform Companies

New technology markets have a distinctive winner-takes-all nature. Competition in new technology markets is often fierce, made more so by the inherent instability of the technology. But once a technology company achieves a clear market leadership position—usually as a fast follower with greater execution than the pioneers—it quickly gains complete dominance and is then almost impossible to replace. The threat it will face comes from the emergence of a newer, larger adjacent market, dominated by another player. For example, in the 1960s, IBM controlled the mainframe market. By the 1980s, Microsoft and Intel dominated the personal computer software and microprocessor markets. In the 1990s, with the rise of the World Wide Web, the new winners were Google in search, Amazon in ecommerce, and Facebook in social networking. Since 2007, Google and Apple have been tied for the top spot in mobile operating systems. While new technologies are emerging, the big players of old are not out of the game. We observe a certain phenomenon: the dominant tech companies may be eclipsed, but not completely replaced. Most of today’s tech companies can be called “platforms” at least to some extent: they create value by matching customers with complementary needs, such as software developers and users (Microsoft’s OS and Apple’s AppStore), suppliers and customers (Amazon), drivers and potential passengers (Uber), and advertisers and consumers (Google and Facebook). The network effects of these platforms are “indirect.” Unlike direct, single-market externalities, on platforms, the value of each market participant (e.g., diners) depends on the number of participants in other markets (e.g., restaurants), and vice versa. Once the platform dominates the relevant market, these network effects are self-sustaining, as the growth of users on each side helps generate more users on the other side. Thus, platform markets are “multilateral markets” because they facilitate interactions between at least two or more types of players.

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A giant Internet company as a platform can be measured by four dimensions. First, platform companies must have financial strength, whether it is a huge market capitalization, abundant cash, or extremely profitable mechanism. Only if the platform company has sufficient funds can it make strategic acquisitions and carry out adequate layout. Second, platform companies must have direct access to a significant number of consumers. In other words, all platform companies have hundreds of millions of sincere and loyal users. Third, after acquiring users, platform companies must build their brands through meaningful ongoing engagement and mine a lot of useful data from their users. All platform companies are big data companies by nature. Fourth, platform companies must have extensive experience in building platform operating systems that are defended and supported by a vibrant developer community. On this basis, we identify five characteristics of platform companies. First, data-driven. These companies are constantly presenting many aspects of the world as data that have never been quantified before. People are contributing data to these companies all the time. Second, after getting the data, they create economic value from the data, which is called monetization. Third, diversification and centralization. These companies build multilateral relationships through platform organizations. Fourth, personalization. These companies personalize content, services, and advertising through algorithms. Fifth, globalization. All of these platforms compete in a global scenario, and they strive to build a global communications and services infrastructure. In other words, the battle of the platforms is a very typical battle of the titans. 4.3

Lessons from the Development of the Internet: Heraclitus’ Law

Beyond the imagination of many Internet users, the Internet is rapidly becoming something controlled by platforms. Decentralization was once widely considered to be the hallmark of the Internet. However, the reality is that 10 years ago, people had an open cyber utopia, while today they are faced with a world of walled gardens, each of which is guarded by a giant monster.

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There are two examples. First, although the total share of Internet advertising is rising, almost all of the rising share is taken by the two giants, Google and Facebook, which account for more than half of the share. They are closely followed by another Internet giant, Amazon.25 Second, while cloud services are also booming, it is also an oligopolistic market. Amazon’s global share of the public cloud space has remained at about 40%. The remaining big Internet platforms—Google, Microsoft, and Alibaba—are absorbing share, while the others are losing money.26 This situation raises a number of concerns for the public, such as concerns about monopolies. Both duopolies and oligopolies can slow down innovations. The tentacles of Internet companies will reach out to neighboring markets, leading to a very high probability that the neighboring markets will be swallowed up by the Internet platforms. At the same time, any emerging field is destined to be on the plate of Internet companies as well. But will the Top Five rule forever? I think Heraclitus’ law applies to the Internet, which is that new waves of technology always give opportunities to players who come later. Technology has lowered the cost of entry, the previously excruciatingly sunken capital is increasingly insignificant, and consumers can easily switch platforms. All of this, combined with disruptive innovation that shows no sign of slowing down, puts every Internet company at risk, even if it temporarily achieves winner-takes-all status. Heraclitus, an ancient Greek philosopher, famously said, “One cannot step into the same river twice.” This is because rivers change, and so do the people who step into them. There are several valuable lessons we can learn from the past history of the Internet. First, the only constant is change, which is a home truth today. Until 1980, IBM sat firmly at the top for many years. Then we moved from the mainframe era to the personal computer era, and Microsoft took over the baton from IBM as the leader of technology companies. As we move

25 Daniel Liberto. Facebook, Google Digital Ad Market Share Drops as Amazon Climbs. Investopedia, Jun. 25, 2019. https://www.investopedia.com/news/facebook-goo gle-digital-ad-market-share-drops-amazon-climbs/. 26 Global Public Cloud Scale Reaches $20 Billion, with 70% Market Share Controlled by Four Giants. Forbes China. http://www.forbeschina.com/technology/45653. Nov. 19, 2019.

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from the personal computer era to the mobile era, the baton is passed again, this time from Microsoft to Apple. Second, the leader of one era will not lead the next. IBM did a great job until it allowed Bill Gates to own a personal computer operating system. With the introduction of touch screen phones, Nokia’s market cap fell 90% in just six years.27 If the next platform is AR/VR, Google, Facebook, and Apple will all be players without missing out on major opportunities like their predecessors. Third, change is happening at an accelerated rate, so we say change itself is changing. IBM has continued to act as the dominant player for more than 50 years, Microsoft has been at the top for 13 consecutive years, and Apple has led the pack for only half as long as Microsoft. This also explains why the world’s highest market capitalization companies today are Internet companies, because they change the fastest. Moreover, technology domination in one era is not the same thing as technology domination in another era. IBM, for example, as a former global technology leader, accounted for a staggering 75% of the entire industry back then. But when it came to Microsoft and Apple, although they are also a dominant party, the proportion of the two companies is actually declining. Microsoft reached its peak in late 2003 with 25% of the technology industry; but in the following year, Microsoft’s share dropped to 18.2%, the first time the share of a technology juggernaut fell below 20%. In subsequent years, the percentage of the total market value of the technology market controlled by the largest technology companies has hovered in the mid-teens percent range.28 In other words, the technology industry in general is growing, but at the same time, the share of large technology companies in the overall technology industry is declining. While many large companies in vertical markets have achieved “winnertakes-all” status, there have proven to be several big winners, such as Netflix in audio and video and Uber in travel. And while the bigger winners have seen greater growth in market capitalization, their share of the total market capitalization pie has remained fairly stable.

27 Quy Huy, Timo Vuori. Who Killed Nokia? Nokia Did. https://knowledge.insead. edu/strategy/who-kiled-nokia-nokia-did-4268. Sep. 22, 2015. 28 Silicon Rally. The Economist. https://www.economist.com/graphic-detail/2015/07/ 24/silicon-rally. July 24, 2015.

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4.4

Technology Bubble Likes Financial Bubble

Of course, it should also be very clear that the power of the Internet giant companies remains unstoppable. Techies like to portray their industry as a sea of disruption, with each winner vulnerable to sudden attacks from some enemy that popped up and would never have been imagined before. “Someone, somewhere in a garage is gunning for us.” Eric Schmidt, former executive chairman of Alphabet (Google’s controlling parent company), likes to say so.29 Yet over the past few years, all five giants have shown a remarkable ability to dismantle imaginary enemies in the garage. You can even bet they will continue to win because they are more entrenched in their own territories, stronger in new ones, and better able to block competition from emerging rivals. While the competition among FAMGA remains fierce—every year we see them rise and fall, it is increasingly difficult to imagine any one of them, let alone two or three, losing their growing influence in business and society. In fact, the fearsome Top Five form a powerful moat in the face of startups. In most cases, the rise of new companies has only served to consolidate the leading edge of the Top Five. Look at Netflix hosting its movies in Amazon’s cloud; Google’s venture capital arm making a huge investment in YouTubers; Apple and Google mandating payments from all apps within their app stores; and Google and Facebook charging startups for marketing (as the two advertising giants). Without this, startups would not be able to provide users with a channel to download their products. Platforms also provide the Top Five with a huge advantage when they pursue new markets. Look at how Apple attracted 10 million subscribers for its streaming music service in its first six months of operation,30 or how Facebook leveraged the popularity of its main app to drive users to

29 Chris Gayomali. Eric Schmidt: The Next Google Is Out There in a Garage Somewhere. Fast Company. https://www.fastcompany.com/3037098/eric-schmidt-thenext-google-is-out-there-in-a-garage-somewhere. Oct. 14, 2014. 30 Garrahan M, Tim B. Apple’s Music Streaming Subscribers Top 10m. The Financial Times. https://www.ft.com/content/742955d2-b79b-11e5-bf7e-8a339b6f2164. Jan. 10, 2016.

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download a standalone Messenger app. According to TechCrunch, Facebook removed the chat feature from its main app in 2014, and users had to download Messenger to continue chatting on their mobile devices.31 The Top Five are advancing the news and entertainment industries, they are making waves in health care and finance, and they are building cars, drones, robots, and immersive VR devices. Why do they keep expanding the boundaries of competition? Because their platforms— including users, data, and all the money they make—make these far-flung areas seem to be well within their grasp. That is not to say these companies will never die. Not long ago, IBM, Cisco Systems, Intel, and Oracle were considered technologically unparalleled; today, they are still big companies, but their influence is nowhere near as great as it once was. There is also the possibility of growing competition from abroad, especially from Chinese hardware and software companies that are accumulating equally important platforms. There is also the threat of regulatory or other forms of government intervention. EU regulators have opened antitrust investigations against the Top Five under antitrust and privacy grounds. However, even with these difficulties, the solid position of the Top Five platforms may be difficult to shake. Take government regulation as an example: while government intervention tends to limit one giant, it also supports another. If the European Commission decides to fight Android on antitrust grounds, Apple and Microsoft could be the beneficiaries. Who won when the US Justice Department accused Apple of manipulating to raise the prices of e-books? Amazon. In this case, technology companies in particular need to stay humble. Like the financial bubble that preceded it, there was a technology bubble. The financial bubble arose because the market expected finance to give it particularly high returns, so financial firms had to invent all sorts of things, especially derivatives, to meet the market’s demand for it. As market expectations of the financial sector’s profitability relative to the underlying economy have become so irrational, the increasingly elaborate money-making schemes proposed by the financial sector are doomed to

31 Josh Constine. Facebook Forces Users Worldwide to Download Messenger for Mobile Chat. TechCrunch. https://techcrunch.com/2014/07/28/facebook-moving-mes sages/. July 28, 2014.

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be unsustainable. The end result is something we all know: greed led to the financial crisis. Like these financial companies, technology companies exist as a dimension above the underlying economy. Internet platform companies need to realize that the reason they have reached the size they are today is because there are a large number of companies around the platform that need to earn money. If these companies cannot make money, where is the basis for the existence of platform companies? Platforms have a naturally expansive nature. It is often not remembered that when these companies seem to cannibalize other sectors of the economy, they are still dependent on the customers who derive value from their services. Companies around the platform only advertise on Facebook and Google when they determine it is more profitable. Cloud revenues depend on a variety of commercial software and services for profitable business. Third-party providers choose to sell on Amazon because they can make money doing so. In other words, for the most part, the Top Five platform companies exist at their current size only because they provide a larger base economy for for-profit companies. However, the inherently disruptive nature of technology companies raises questions about how far they can go. This is because, in a sense, they can only grow by putting some of their customers out of business, either directly or indirectly. For example, a food delivery company would have had good business and was a prolific advertiser online. If Amazon directly launches a competing service that puts it out of business, Facebook and Google will lose some advertising revenue, and Microsoft and Google (and Amazon itself) could lose some cloud revenue. That said, these technology platforms and the companies they serve exist in an ecosystem that must strike some sort of balance. Profitable companies can only allocate the bulk of their revenue to advertising, cloud services, information technology, etc. If their profits disappear or their growth is disrupted by technology companies, their advertising and technology spending will disappear. Some very successful predators can destroy their ecosystem, which then leads them to have nowhere to feed and become even hungrier. As stocks become more highly valued, the technology industry will feel the same kind of pressure that Wall Street felt a decade or so ago. Similar collapses can occur in ecosystems. Today’s technology elite must feel this point in history, because they will end up in their own twilight if they

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do not strike the right balance. That is why the technology elite need to overcome their arrogance.

5 Let us Open Assets, Data, and Minds---Preface to Peers Inc – Preface to Peers Inc Sharing for all must lead to benefit for all, and benefit for all means benefit for the earth.

Robin Chase has written a book entitled Peers Inc: How People and Platforms Are Inventing the Collaborative Economy and Capitalism.32 When you land on the author’s website, the first thing that strikes you is five sentences: Let Let Let Let Let

us us us us us

build the economy of abundance. find excess capacity and unleash it. open assets, data, and minds. address climate change and income inequality. create the world we want to live in.33

For an entrepreneur, these are ambitious goals. Not surprisingly, Robin Chase is not the kind of entrepreneur you might expect. As a selfproclaimed “transportation entrepreneur,” she founded the car-sharing company Zipcar, the peer-to-peer car rental company Buzzcar, and the carpooling site GoLoco. What is unique about these companies? As you might have guessed—they are all pioneers of the burgeoning sharing economy. “Sharing” is, of course, the key word in this book. When you open the book, the preface pops up with the title “Welcome to the decisive period of the sharing economy.” By defining the decisive period, Chase is clearly looking back on her own glorious career in a victorious tone. However, the sharing economy did not have a great start. Turning the clock back to 2000, Chase tells how in the early months of 32 Robin Chase. Peers Inc: How People and Platforms Are Inventing the Collaborative Economy and Capitalism. Rui Wang (trans.). Hangzhou: Zhejiang People’s Publishing House. 2015. 33 http://www.robinchase.org/#every-day-create-the-world-you-want-to-live-in.

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Zipcar’s establishment, she had the same nightmare: a villain in the car rental industry burst into the room and pointed a gun at her and her husband. The reason, of course, was that the business model she had created was destroying an industry that had been around for hundreds of years. How can a century-old industry be destroyed so easily? You guessed it again: by the Internet. When Zipcar started out, Chase began by figuring out what customers cared about most when renting a car, and got the answer “affordability and convenience.” So all of Zipcar’s business models are built around affordability and convenience, trying to reduce the cost of money and time needed to rent a car. She innovated faster reservation, easier pickup, and more convenient payment, and minimized the process of manual service to give consumers a high degree of autonomy with self-service. Zipcar also focused on technology to enhance the user experience of traditional car rental. For example, it has installed RFID transceivers in cars, which can read member information, open doors, and update the time and mileage of cars to the control center; it has also introduced mobile technology, allowing users to check and reserve cars through mobile devices. Following this concept of car sharing, a number of benefits have been identified for changing the way cars are traditionally used: first, it can give full play to the role of each car, reducing the rate of vehicle ownership and parking lot occupancy; second, it can reduce the “carbon footprint” of consumers, which is a blessing for the environment and the changing climate. In this light, it is no coincidence that Chase proposes the five quests in the opening chapter. The Peers Inc is an exploration of how the masses and platforms can build a sharing economy that will break through capitalism and improve the world. Chase attempts to portray a zeitgeist in the book. The ecosystem of excess capacity + mass participation platforms + diverse individuals forms a new “sharing by all and sharing for all” model that combines organizational advantages (scale and resources) with individual advantages (localization, specialization, and customization) to create abundance in a world of scarcity. Today, we are familiar with Uber, Airbnb, and Bitcoin, which together are disrupting a wide range of sectors from transportation to travel to finance. Chase figures that the sharing economy raised a total of $3 trillion

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in 2014. Time magazine says there are about 10,000 companies active in the sharing economy.34 There are so many things that can be shared: properties, resources, time, data, skills ... This is a huge challenge for old-fashioned industries and for society as a whole. For example, jobs may become increasingly scarce, and job security increasingly a thing of the past. The benefits of the sharing economy are clear: by sharing their assets, owners give them multiple uses that are both profitable for themselves and create socioeconomic benefits. As Chase says, the sharing economy redefines our understanding of an asset. Is it exclusive to the individual or shared by the public? Is it privately or publicly owned? Is it commercial or personal? We all know that sharing resources leads to efficiency and sharing knowledge leads to innovation. So what does sharing assets bring? Chase is smart enough to understand that the first to embrace the asset sharing view must be young people. That is why Zipcar has put a lot of effort into capturing the college town market, winning two-thirds of its members, under the age of 35. Young people like the low-cost threshold of Zipcar’s car rental service and prefer the idea of green travel. Even Zipcar’s definition of the brand “wheels when you want them” and its smile-inducing advertising slogans “Where did it go wrong to spend 420 hours looking for a parking space when you have sex 350 hours a year?” exude young, hip vibe. What are the characteristics of young people’s consumption? Experience, experience, and experience. Therefore, the sharing economy is actually an experience-based economy, more specifically the “experience right now” economy. They demand instant access and pay for what they use. For the new generation, assets are becoming more and more weightless. Often, they do not seek to own, but only to use. And therein lies the crux of the sharing economy: young people on the rise in life cannot imagine that workers in the sharing economy will have no pensions, health insurance, disability insurance, or vacation time. This group, known as “uncollar workers”—neither blue-collar nor whitecollar, will face the perplexing question: Where do we stand between the employed and the exploited? Chase writes, “We need to create a new social mechanism to universalize the benefits of the new platform economics - to allocate even a 34 “Baby, You Can Drive My Car, and Do My Errands, and Rent My Stuff….” Time. https://time.com/3687305/testing-the-sharing-economy/. Jan. 29, 2015.

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basic income to everyone. If this is not done, the consequences for society could be dire.” In this sense, sharing for all must lead to benefit for all, and benefit for all means benefit for the earth. So, advocates of the sharing economy have to face not only input-and-output problems, but also life-and-death problems. We need sharing for all because what it will achieve is to meet the needs of the greatest number of people with the least amount of stuff. At a time when climate change, population growth, and environmental degradation are greatly threatening our blue planet, may everyone with an open mind understand and practice the sharing economy from this point of view.

6 A Seismic Digital Shift Is Occurring Everywhere A large earthquake is always followed by earth crustal displacement, where the margin of yesterday becomes the center of today.

6.1

Worldview: A Different Perspective on the World

Maps lead the way for us to see the world. Maps not only depict geographical information in graphic form, but also reflect the worldview in people’s minds. In China, the world map was not created until 1584. More than 400 years ago, China did not have a decent map of the world, but only an imagination of the relationship between China and the world—China in the middle, surrounded by the sea, with a few scattered islands. These islands were the foreign countries in the eyes of the Chinese people at that time. This was their worldview. In 1584, Mateo Ricci, a missionary from Italy, made Daying Quantu (Complete Map of Sea), the first Chinese version of the world map, in Zhaoqing, Guangdong Province. After that, Mateo Ricci moved to Nanchang and Nanjing cities of China successively, and drew several versions of the world map, with the name changed many times, and it was finally named Shanhai Yudi Quantu (Complete Map of Mountains and Seas ). These versions were lost one after another, and the one that finally survived and had the greatest influence was the Kunyu Wanguo Quantu (Complete Geographical Map of Ten Thousand Countries ), which was engraved and printed by

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Li Zhizao in Beijing in 1602.35 The original engraved copy of this map is no longer preserved in China, but is available in Europe, America, and Japan. The earliest and only extant copy of the map in China is now in the Nanjing Museum, which is a color copy by the imperial court in the 36th year of the Wanli Era of the Ming Dynasty (1608).36 The world in this map was vast to a staggering extent, but China was not in the middle of the world, so many imperial officials were unhappy about it. “They were convinced that their country was the center of the world, and disliked the geographical concept that we had pushed China to a corner of the East.”37 Considering that this conflict of ideas was detrimental to his missionary work, Matteo Ricci placed China in the center of the map through a change of perspective, changing the cartographic pattern of Europe being in the center of the world. In order to make the Chinese scholars inclined to accept it, Matteo Ricci followed as much as possible the names of the overseas countries in ancient Chinese gazetteers. At that time, Oceania had not yet been discovered, so there were only five continents on the Kunyu Wanguo Quantu—Asia, Europe, Africa, North and South America, and Antarctica, while the ocean was divided into four regions—the Atlantic, Pacific, Indian, and Arctic oceans. The map had latitude and longitude lines, the equator, the Tropic of Cancer/Capricorn, and so on, with the outline of the world’s land and sea being basically complete; in addition, it was accompanied by geographical stories, painted with sailing ships, animals, etc. It is worth noting that the Chinese term “diqiu” (earth) was first introduced by Matteo Ricci. He clearly proposed that the world was a sphere in the text of Kunyu Wanguo Quantu: “The earth and the sea are originally round and united into one sphere, living in the middle of

35 Yingyan Gong. Does the Kunyu Wanguo Quantu Contain the Secret of “Zheng

He’s Discovery of America”. Guangming Daily. Sep. 23, 2018. 36 The Treasure of World Maps—The Kunyu Wanguo Quantu by Matteo Ricci. Nanjing Museum. https://web.archive.org/web/20090302110202/, http://www.njm useum.com/zh/new/20071126web/13.html. 37 Matteo Ricci, Nicolas Trigault. Regni Chinensis Descriptio. He Gaoji, et al. (trans.). Beijing: Zhonghua Book Company. 1983. 180.

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the heavenly sphere, like an egg, with the yolk inside the egg white.”38 This was well understood by the Europeans who experienced the great explorations in the Age of Discovery from the mid-fifteenth to the mid-sixteenth centuries, but for the Chinese it was a reversal of the traditional worldview, that is, the subversion of the concept of “the land under heaven” by the concept of “earth.” There is a world of difference between “earth” and “the land under heaven.” Ricci criticized the Chinese scholars, “Because of their limited knowledge, it is not surprising that they boast of their own country as the whole world, and define it as the world, meaning the land under heaven.”39 The ancient Chinese generally believed that “the sky is as round as a piece of lid, and the land is as square as a chessboard,” and the “land” we live in is the “world.” This is the traditional Chinese theory of “round sky and square earth.” In his notes, Matteo Ricci describes this concept of the Chinese at that time: “They think that the sky is round, but the earth is flat and square ... They cannot understand the statement that the earth is spherical, made of land and sea, and in their eyes, spheres are by nature headless and tailless.”40 Since the earth is a headless sphere, drawing a map on paper required the use of projection. This raised the question of where to look at the earth. Ricci pioneered the Chinese cartographic model by projection transformation. The world map we Chinese know later actually applies Ricci’s rule, with the Pacific Ocean as the center. In such a world map, the world around the Pacific Ocean is represented more accurately, while the rest of the world is inevitably distorted, especially in the circumpolar regions, which are greatly distorted. The map centered on the Pacific Ocean is completely different from that centered on the Atlantic Ocean. The latter places the United States across the Atlantic from Europe as the center of the world. Thus, each country tends to place itself at the center in its own map of the world. In

38 The quotation is based on Kunyu Wanguo Quantu, photocopied by the Yu

Gong Society, 1936. Weizheng Zhu. A Collection of Matteo Ricci’s Chinese Works and Translations. Shanghai: Fudan University Press. 2001. 173. 39 Matteo Ricci, Nicolas Trigault. Regni Chinensis Descriptio. He Gaoji, et al. (trans.). Beijing: Zhonghua Book Company. 1983. 180. 40 Matteo Ricci, Nicolas Trigault. Regni Chinensis Descriptio. He Gaoji, et al. (trans.). Beijing: Zhonghua Book Company. 1983. 180.

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1979, the world even saw the first map of south up and north down in order to place Australia at the center. In any case, the maps produced all over the world were horizontal. However, in 2013, Dr. Hao Xiaoguang of the Institute of Geodesy and Geophysics of Chinese Academy of Sciences, after more than a decade of efforts, convinced the state authorities to grant him permission to publish the world’s first vertical map. Unlike traditional maps that divide the world by longitude lines, Hao’s vertical map of the world cuts the earth along 15°N and 60°S, dividing it into north and south hemispheres. This is a revolutionary change from the traditional horizontal version of the world map. The vertical world map shows the complete polar regions, where the Antarctica is surrounded by the Indian Ocean, the Atlantic Ocean, and the Pacific Ocean, like a peacock with an open screen, while the location of the North Pole in relation to the other continents is more clearly shown. According to Shan Zhiqiang, Deputy Director of the Publication Committee of the Geographical Society of China, for more than 400 years, Chinese world maps have never departed from the framework of the China-centered Kunyu Wanguo Quantu drawn by Matteo Ricci, while Hao’s new version of the world map overturns the old “world view” of the earth from a single perspective.41 See the world from a different perspective, and it will have an impact on your behavior. For example, on Hao’s vertical map, the United States is to the north of China, not to the east of it. With this realization, the coverage of BeiDou Navigation Satellite System points from the Pacific Ocean to the North Pole. A certificate issued by a relevant authority to Hao Xiaoguang said “the new Series of World Maps accurately depicts the geographical relationship between China and the world from a unique perspective ... provides an important reference for the development and construction of China’s second-generation satellite navigation system.”42 Therefore, when understanding the world, it is necessary to turn familiarity into unfamiliarity, that is, to leave behind the original understanding of the nature of things, so as to reconceptualize things from scratch. 41 Hao Xiaoguang and His Vertical World Map: Make the World “Vertical” up. People’s Daily. May 20, 2016. 42 Hao Xiaoguang and His Vertical World Map: Make the World “Vertical” up. People’s Daily. May 20, 2016.

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6.2

The Margin Becomes the Center

We should also go beyond the surface of the earth to take a deeper look at the planet that hosts our lives. According to the theory of plate tectonics, the earth is composed of six large plates and several small plates, with these solid plates pushing, rubbing with and colliding with each other in violent activities, and changing the face of the earth. A plate as big as a continent often takes years to move a little distance, while it can achieve maximum displacement in a flash during a major earthquake. Displacement is actually a geomechanical concept. When displacement develops to a certain point, a new continent is created. Geologists believe that in about 50–200 million years, the continents on the earth will converge into a single supercontinent. This is a displacement on a huge scale, a displacement of plates. The rocks on the margin of each formed supercontinent will become the center of the next formed supercontinent. Thus, the center point of the next supercontinent, the Amasia supercontinent, would be located near today’s North Pole.43 During this movement, North America and South America will gradually come together and the Caribbean Sea will close. At the same time, North America will move closer to Asia and Europe, leading to the closure of the Arctic Ocean. Africa and Europe will be united, and the Mediterranean Sea will disappear. Australia will continue its current “northward drift” and will eventually become one with Asia. Antarctica will remain isolated from the supercontinent. One of the great features of displacement is that it turns what used to be the margin into the center. By analogy, the Internet, as a force of oscillation, has now created a new “continent.” The formation of this new continent has had a significant impact on existing society, both in terms of structure and function and in terms of the relationships between members of society. Speaking of the “margin,” there is a noteworthy book called How China Became Capitalist, written by the great economist Ronald H. Coase and his Chinese student Wang Ning.44 The book discusses exactly where China’s reforms of the past 30 years have succeeded. Coase’s

43 Experts Believe More Firmly That the African Continent Will One Day Be Divided in Two. Q Daily. https://www.qdaily.com/articles/51755.html. Apr. 3, 2018. 44 Ronald H. Coase, Ning Wang. How China Became Capitalist. Yao Xu, Zhemin Li (trans.). Beijing: CITIC Press. 2013.

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theory is simple: he calls China’s reforms “marginal revolutions,” meaning that they consist of revolutions at four major margins—the rural household contract responsibility system, private entrepreneurs (getihu), special economic zones, and township enterprises. The “protagonists” of the revolutions in all the four areas are marginal actors from socialism. The door to the rural household contract responsibility system was quietly opened when the hungry peasants, with grief, courageously entered into the contracts without the government’s knowledge. When millions of unemployed persons and educated youth in the urban areas had to find their own jobs to make ends meet, the humiliated self-employed broke into a new path of urban reform. As thousands of people risked their lives to change their fates by repeatedly smuggling themselves into Hong Kong, the monument of “Special Economic Zone” was erected. With countless farmers starting to set up township enterprises, it has opened up a broad path for the rise of Chinese industry and commerce. According to economist Zhang Shuguang, there are two kinds of reforms in China since the reform and opening up: one is the topdown reform initiated and guided by the government, and the other is the bottom-up reform initiated by the grassroots. The latter is in fact a marginal revolution. What is the reason for the marginal revolution? According to Zhang Shuguang, it was a choice of last resort in a crisis situation, for if they did not do so, they would be at the end of their rope, and the interests of many classes had already been damaged. Of course, it should be recognized that this was something that the system at that time could allow and accept. Without the tolerance of the system at the time for these grassroots innovations, China would not have reached the heights it has today. Therefore, the inclusiveness of the system is very important.45 6.3

The Internet Revolution Is a Marginal Revolution

Following this line of reasoning, I believe that the Internet revolution is the fifth marginal revolution in China. The Internet society has evolved from the bottom up in China, but it does grow in a way that cannot be separated from the inclusiveness of the system. In the early days, the 45 Shuguang Zhang. Marginal Revolution, Regional Competition, and the Marketplace of Ideas. Dushu (Reading). 2014 (2).

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development of the Internet in China was in the hands of the industrial sector, which ensured that the idea of “development before governance” was adhered to during the pioneering phase. This regulatory philosophy played a decisive role in the advancement of the Internet. In February 1997, the State Council Informatization Leading Group (SCILG) organized a report meeting on the digital information revolution, which opened Negroponte’s first official visit to China, bringing the first lesson for the Chinese Internet.46 Along with the interconnection between China and the international Internet, China stepped into the Internet era. Negroponte argues that the basic building blocks of society are changing from atoms to bits. I was so excited when I first read his Being Digital that I translated it into Chinese in just 20 days. His core idea is what he calls “being digital,” which is to find ways to move bits instead of atoms. He foresees that we are entering a weightless economy; we will increasingly exchange not tangible things, but intangible information, services, intellectual property, etc. From this perspective, we can identify a very central issue in the relationship between atoms and bits, namely the eternal contradiction that exists between atoms and bits—the slow change of atoms versus the rapid change of bits. 6.4

The Two Main Directions of Innovation

Peter Thiel, a famous Silicon Valley investor, once said, “We wanted flying cars, but instead we got 140 characters.”47 “140 characters” in this case refers to Twitter’s 140-character limit on tweets. Why does Thiel contrast this way? The car is an example of how slowly the atomic world changes. Today’s cars are certainly more fuel-efficient and safer, but they have not really revolutionized from the cars of 100 years ago. The Boeing 747, which first flew in 1969, was the world’s first wide-body civilian airplane and is still the mainstay of long-haul flights to this day. 46 Hongbing Gao. “Industrial Prosperity” Is the Main Theme of the Third Generation Internet. People’s Daily Online. http://people.com.cn/digest/200102/16/wl021606. html. Feb. 13, 2001. 47 Joshua Schwimmer. Still No Flying Cars? Debating Technology’s Future. The New York Times. https://www.nytimes.com/2014/09/22/arts/peter-thiel-and-david-graeberdebate-technologys-future.html. Sep. 21, 2014.

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Let us take another look at the cell phone. Thirty years ago, a cell phone was as big as a brick; 10 years ago, it started to become small and light, but it was still a phone; today’s cell phone is no longer just a phone, it is a camera, radio, television, game console, credit card, but also a wireless navigation device, health management device, and even a personal production tool. Compared to cars and airplanes, cell phones have evolved as fast as lightning. If the atomic world is changing so slowly, how can the eternal contradiction between atoms and bits be resolved? There are two paths: replace atoms with bits; or use bits to change the way we use atoms. This creates a rich ground for innovation. For example, bits will never replace cars or airplanes, but they will change the way we use them. The Tesla car, sought after in Silicon Valley, not only heralds the future of electric cars, bringing major changes in energy, but also combines traditional automotive technology with modern software. The car of the future is not just a vehicle to move around, but also an interface platform with an array of software programs connected via wireless networks for owners to work, study, and play. There will be many programmers and application developers creating a range of applications for the car, from personal assistants, navigation, life search, and car services to on-demand movies and music, and to instant messaging. The wealth of services in the car can do more than inform and entertain; it can also help optimize the entire transportation infrastructure. When a smart car is on a smart road, drivers can share a lot of information with each other. Networked cars will be enriched by sensors fitted with the ability to share data on weather and road conditions with other neighboring drivers. In the event of a traffic accident, your car will immediately notify all drivers behind. Some apps can promote carpooling, while others can ease congestion and keep you safe by spreading road traffic more evenly, or reduce air pollution by choosing the best route. The abundance of automotive applications could even cause a revolutionary disruption. That is about the question: Why do we need to own a car? Given the time, place, traffic congestion, and seasonal demands, the best way to use a car is to rent one, not own one. As we move further into the driverless era, even the concept of driving becomes redundant. One day, cars will organize themselves in a networked way, and your car will become a node in an intelligent peer-to-peer transportation network.

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6.5

From the Editorial Office to the Classroom and the Clinic

If heavy atoms like cars can be transformed into network nodes, how much harder can it be for other industries to learn the subtle art of creating open platforms for innovation to work? Now is the time for us to do something similar for all industries, to drive them one by one to evolve a business ecosystem for which millions of users add value and collaborate. Today, we can witness a huge digital displacement from the editorial office to the classroom and the clinic. All these places may not be able to exist without unfolding their digital career. What has changed in the editorial office now? What kind of scenario has the digitization of media created? This can be summarized by four “nots.” First, the journalism is not the journalism. Journalism is a unique social and historical practice, and the media is the organization and technology by which journalism is produced. What happens to journalism when media “production” becomes easy to access and the people who make it have an unlimited supply? It could be argued that once consumers are encouraged to become media producers and make connections in the dispersed media content, journalism becomes an activity rather than a profession. Second, the media is not the media. The media changed not from one type of news organization to another, but from a privileged institution to a part of an information dissemination ecosystem in which a variety of formal organizations, informal collectives, and numerous individuals are intermingled. This indicates the disintegration of the media, and the rationale for the operation of the media industry was thus rewritten. Third, journalists are not journalists. In the past, the high cost of publishing led to a scarcity of publishers, creating a privileged class of journalists. Today, with the lowering of technological barriers, anyone can become a publisher and, logically, anyone can become a journalist. Whereas we once relied on professional journalists to record the events of the world, we are now increasingly becoming each other’s infrastructure—we are increasingly learning about the world through content shared randomly by strangers. Fourth, audiences are not audiences. What used to be a passive audience has now become a “provider” that actively creates and shares. It is a process where former audiences now form provider communities. The power over content has shifted from the “mass media” to the “masses” and the mass media itself has been “demassified.” All information is about

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“you,” which is why Time magazine named “you” as its “Person of the Year” in 2006.48 Taken together, we are experiencing a shift from mass media to “mess media”. This is the source of great upheaval in the media industry. Five to ten years from now, college teachers will also fall into a precarious position. Today’s universities are losing control of higher education as the Internet gives students more and more options to replace the current model of higher education. The higher education of the future must be cross-cutting, with universities outsourcing many of their non-core courses to providers who can offer quality courses, and keeping only their own top-level courses. The twenty-first-century university should become a network and an ecosystem, not an ivory tower. The Internet gives us the opportunity to create an unprecedented educational experience for students: a collection of the world’s best learning materials online, enabling students to tailor a learning path for themselves with the support of a network of faculty and educational facilitators, some of whom may live within a local university, while others may be on the other side of the world. In order to achieve this, universities need to undergo deep structural changes. Today’s university will become a thing of the past because it can no longer support students to learn at a time and pace that suits them. As with the education model, the old medical model had a huge problem: the patient was a completely passive recipient of medical care, while the doctor was in charge of the process. If a patient is not satisfied with a particular doctor’s treatment plan, he has no other choice but to go through the same process again with another doctor, because the doctors will treat him in the same way. Today, patients are no longer alone, they form communities, and discuss the problems they encounter with each other. Instead of blindly following the doctor’s advice, the patient will go to the doctor with a pile of information retrieved from the Internet and ask questions and queries. Doctors, on the other hand, find this approach challenging to their authority, so they are very resistant to it. But we know that the era of collaborative medicine is bound to come. If you were born with someone building a database of your personal health with data you should have and can control, then later when you

48 Lev Grossman. Time’s Person of the Year: You. Time. Dec. 13, 2006.

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go to the doctor, the doctor can see your data with the appropriate permissions. There will be an extensive network of data to data, where the vast amount of data generated by all the collaboration can provide input to guide future care and together form part of the knowledge base of what we know about health, medicine, and science. As physicians and other healthcare professionals are engaged, they will strive to strike a new balance between professionals and patients as the authority of physicians is broken. With the advent of the self-quantification movement and personalized medicine, the technology of medical assessment will increasingly be in the hands of the individual. If the old “map” of medicine was drawn by doctors, it will begin to be rewritten by people. 6.6

The Internet Breeds New Continents

Regardless of the industry, seismic digital shift will go through two processes. The first process is technology changing business. When consumers enter the Internet completely, a huge black hole will be formed, and all kinds of industries will be sucked into the black hole one after another, where the closer the industries are to the black hole, the more powerful the impact is on the industry. The core of this black hole is cloud computing plus data. Any industry that does not rely on data in the future will completely lose its prospects. Technology changes business, which in turn will trigger a second process—business changes life. This is because consumers want to live happier and healthier. This second process is driven by the vast number of Internet users. According to the International Telecommunication Union (ITU), 4.1 billion people, or 53.6% of the world’s population, are enjoying Internet services. But the other 3.6 billion people are still “offline,” and most of them live in the least developed countries, where the average online population is only 20%. The data show that the Internet penetration rate in developed countries is 87%, which is close to saturation. Europe sees the highest Internet penetration rate of 82.5%; the lowest penetration rate is in Africa, only 28.2%.49

49 ITU: 52% of Women Worldwide Are Offline—Gender Digital Divide Is Widening. UN News. https://news.un.org/zh/story/2019/11/1044991. Nov. 5, 2019.

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The Internet has now given rise to a new continent, one that consists not of the United States, Europe, and Japan, but of Asia, Africa, Latin America, as well as Russia, China, Brazil, and India. The displacement between the old continent and the new one has led to a series of intriguing phenomena as the dominant power of the global Internet begins to shift from developed to developing countries. A report by the World Economic Forum summarizes four characteristics of the Internet’s new continent. First, as mentioned above, newly networked countries dominate this new continent. Second, a global Internet culture is emerging, with users sharing similar values and attitudes on issues of freedom of expression, privacy, trust, and security. Third, users want everything, both freedom, privacy, and trust, as well as security, but they do not see these two categories as mutually exclusive. Fourth, the newly networked countries are more liberal in attitudes, more innovative in behavior, and more supportive of freedom of expression and have a wider range of social platforms, while the older networked countries use more traditional Web applications and take a more conservative approach.50 The planet we inhabit right now is not only a real society, but also a virtual one, covered by the Internet. One of the fundamental questions we face is whether we will have the same world and the same Internet. The Internet Corporation for Assigned Names and Numbers (ICANN), the governing body for Internet domain names, has a vision of “One World. One Internet.”51 However, it is likely that we will see the same Internet fragmented in the near future,52 or at least see the development of the Internet in China and the US drifting apart. Due to the sheer volume of the two Internet powers, the future is likely to see a scenario in which applications and services from China and the US divide on the Internet, causing the

50 The Global Information Technology Report 2010–2011. World Economic Forum in Collaboration with INSEAD, comScore, and the Oxford Internet Institute. April 2011. 51 ICANN. Feb. 6, 2013.

https://www.icann.org/en/system/files/files/ecosystem-06feb13-zh.pdf.

52 Moscow announced in December 2019 that Russia had “successfully tested” the all-Russian Internet, which is not connected to the world. Russia ‘successfully tests its sovereign network’ with disconnection from global Internet. BBC News Chinese. https:// www.bbc.com/zhongwen/simp/world-50912222. Dec. 25, 2019.

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Internet to become the Splinternet—a formal bifurcation of the network system.53 The key choice we face today is: to worsen the fledgling split, or to speak out against it and try to stop the trend. The Internet itself has accomplished incredible things. It is a truly global creation that has enabled people to strengthen their social ties and overcome geographic distances and cultural differences. It has been a key factor in lifting billions of people out of poverty. It has accelerated basic scientific research, which in turn has led to huge advances in health. It has made education more accessible and created a more equal playing field. But we also acknowledge that for more than 50 years we have failed to make good use of the network technologies to build consensus, unite forces, and enable practices that make human life better. The split in the Internet is a reflection of the divide in the global community, where the gap between “us” and “them” has not shrunk, but has increased as never before. How can we break this spell by making better use of the Internet? Negroponte has an answer: the one and only important step is to comprehensively and thoroughly open up the Internet. Do not try to contain it by looking inward, simply because doing so results in isolation rather than connectivity. Stop blocking access to applications. It is indeed time to achieve full access; do more open research; reduce proprietary software; and build a higher degree of cooperation and a worldwide development community. So I invite readers to think about the digital world of the future, which will nourish the mind against avidya, share prosperity, and replace competition with cooperation.54

Imagine a global 5G Internet that combines the frictionless user experience of the Chinese network with the flow of information accumulated in the United States. Such a future is still possible if we take proactive action to build it.

53 Arjun Kharpal. The “Splinternet”: How China and the U.S. Could Divide the Internet for the Rest of the World. CNBC. https://www.cnbc.com/2019/02/04/thesplinternet-an-internet-half-owned-by-china-and-the-us.html. Feb. 3, 2019. 54 Nicholas Negroponte. Being Digital—20th Anniversary Edition. Yong Hu, Haiyan Fan (trans.). Beijing: Publishing House of Electronics Industry. 2017.

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7 The Road of Transformation of China’s Manufacturing Industry55 The networking and informatization of the modern manufacturing industry is the area that Chinese manufacturing enterprises need to tackle, and also a key step for China’s manufacturing industry to achieve strategic international status.

The development of Internet companies and the transformation of brickand-mortar businesses adopt two different strategies. The former advocates “Internet+”, spreading “Internet thinking”56 to as many landing points as possible, highlighting the penetration of “the virtual.” In contrast, we propose that the CPS (cyber-physical system) concept is more suitable for the transformation of brick-and-mortar enterprises than the so-called Internet thinking. The transformation of brick-andmortar enterprises must be directed toward a clear goal to transform the entity structure, so that the virtual and the real can be deeply integrated in order to give full play to the advantages of the “reality.” When solving the problems of economic transformation and sustainable development, we should combine virtual with real, and virtualization should go hand in hand with mechanization and automation, that is, to have a synchronous development of physical fitness and intelligence. In China, it is more important to emphasize the integration of industrialization and informatization. 7.1

CPS: The Mutual Mapping of the Real and the Virtual

As the birthplace of the IT industry, the United States has a deep heritage of R&D and innovation. There is a collection of nimble minds there who often create unique business models with unexpected foresights that are widely reported by the Chinese media and copied by Chinese companies 55 Co-written with Yushi Shen and Hanzhong Gao. 56 The concept is not rigorous and opinions about it are diverse. For example, Alibaba’s

Chief Strategy Officer Zeng Ming summarized the spirit of the Internet as equality, openness, interaction, and iteration, while Xiaomi’s Lei Jun said the core ideas of the Internet are focus, extremity, word-of-mouth, and speed. This book uses this concept to refer to a way of thinking based on the characteristics of the Internet to re-examine the market, users, products, corporate value chain, and even the entire business ecology.

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in droves. In addition, there are many thinkers and doers in the United States who are deeply open to real industry changes and business innovations, but are rarely exposed in China. Among them, CPS is a concept conceived by knowledgeable people dedicated to exploring and studying the application and development of the IT technologies with funding from the National Science Foundation of the United States, and has been building up its strength for many years. Although it does not have such a resounding name as “Internet thinking,” it points to the right direction for the digital transformation of the real economy. Please note that the Internet was also funded by the same foundation for more than a decade before it was gradually accepted by the outside world. For the full name of CPS, cyber-physical systems, we seem to have a hard time understanding the gist of it literally. In the early days, CPS focused on system modeling and realistic interaction of embedded machines. With the rapidly decreasing threshold of general-purpose computing technologies such as the Internet, cloud computing, and big data, the unit cost of the original computing and network resources tends to be close to zero. However, under such circumstances, the inherent real-time, concurrency, and feedback genes of embedded systems remain irreplaceable and instead become invaluable. Embedded system is a computer system with exclusive functions embedded inside a mechanical or electrical system, which usually requires real-time computing performance. It is also characterized by concurrency, that is, multiple computations can be performed simultaneously in the system, and there is potential interaction between them. Thus, the system will have quite a few paths, which may produce uncertain results. Also, like most control systems, embedded systems make use of feedback. Feedback implies a loop with direction, where the output of one actor is returned, affecting the input of the same actor. In the field of general-purpose computing, software refers broadly to the programming languages executed by various central processors. In the new generation of embedded systems, the computer architecture will go beyond the five major components (controller, operator, memory, input device, and output device)57 proposed by John von Neumann to include 57 The Hungarian-American scientist John von Neumann laid down the basic structure of modern computers. The von Neumann machine consists of five major parts, namely operator, controller, memory, input device, and output device.

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more large system elements such as the Internet of Things. The focus of software will deviate from traditional procedures and focus more on various types of process and algorithm innovation. The process is similar to that of a fashion designer overtaking a traditional tailor in the readyto-wear industry. The key feature of embedded systems is that they are dedicated to handle specific tasks, so engineers can optimize them to reduce the size and cost of products and enhance their reliability and performance. There is no upper limit to the size of the embedded system itself; it can be a washing machine, a complete smart home, a large aircraft, or a traditional industry, or perhaps even encompass an entire society. In recent years, the ability of CPS to guide and build large systems has become increasingly apparent. Like the Internet itself, the meaning of CPS is evolving. We believe that CPS connotes more than the words cyber and physical. The word “cyber” is derived from an ancient Greek word that means “helmsman” and by extension “control.” When the Internet was born, it was intended to revive this ancient word and use it to denote virtual space. The word “physical,” as opposed to cyber (virtual space), naturally represents physical space. So, what does it mean to put virtual space and physical space in the same system? Through in-depth study, we found that the connotation of CPS is the association of the two spaces, that is, the virtual space and physical space are mapped to each other to form an ascending system. Therefore, it should be more appropriately called “virtual-physical mirror system.” Although the word “mirror” is not explicitly stated, the fact that the virtual and the physical are put together has already emphasized the mapping relationship, and the system concept is also carried through. What are the advantages of CPS? Unlike the traditional general computing model “cloud + terminal,” CPS inserts a new value element into the current hot O2O (Online-to-Offline) service and sharing economy chain. In other words, CPS can push embedded computing and the Internet of Things (IoT) to form a closely coupled system of virtual elements (information, data, and processes) and physical elements (people, machines, and goods). This is the case, for example, with the smart home.

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Manage Low-Dimensional Space from High-Dimensional Space

What do we need the network for? For communication? Connection? Aggregation? Cloud computing? Or big data? All of these stays on the surface. The proposition of CPS is very clear: to establish a shadow or mirror of the physical space on the network, in order to add a virtual space dimension to the space-time we live in, so that the physical space gets holographic and immortalized. In this way, the state of physical space becomes traceable, predictable, and analyzable, and everything is under remote control. Several Hollywood movies have shown us that activities in lowdimensional space can be effectively managed from high-dimensional space. The confusing chaos in low-dimensional space can be seen at a glance in high-dimensional space. There is first-class scientific insight behind these movies, especially in physics. David Joseph Bohm, a heavyweight in the field of quantum mechanics, has made an extremely significant contribution to physics, namely the holographic view of the universe. The “fish in a fishbowl” is a classic experiment that illustrates the concept of holography: two cameras are deployed perpendicular to each other to “observe” a fish in a rectangular glass fish tank, and the camera videos are played out on two separate TV sets. From the two TV sets, we could see that the “two” fish are swimming in different directions at the same speed. You would eventually perceive that there is some kind of connection between them. When one fish turns, the other makes a slightly different action; when one is facing forward, the other always faces to the side. Look at another experiment. In 1982, a team of researchers led by physicist Alain Aspect conducted what is probably one of the most important experiments of the twentieth century at the University of Paris. Aspect discovered that, under certain circumstances, subatomic particles, such as electrons, can communicate with each other no matter how far apart they are. Whether they are 10 feet or 10 billion miles away, they always seem to know the state the other is in.58 Bohm’s explained the above two experiments in this way: two entangled particles should be regarded as two different lower-dimensional projections of the same higher-dimensional reality, which appear to be not in contact and causally unrelated in three dimensions, whereas the 58 1 foot ≈ 30.48 centimeters; 1 mile ≈ 1.61 kilometers.

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two particles are actually related to each other in a way very similar to the way the “two” fish are associated with each other in the above mentioned two TV images. Therefore, “universally speaking, the implicate order must be extended to a higher-dimensional reality, which is in principle an indivisible whole.”59 The term “implicate order” means that things are intertwined and mutually involved at the implicit level. In other words, the universe itself is a holographic projection, and deeper in the “real” there is a more complex spatial dimension that we do not yet know. Within the apparent universal order, there is another continuous order that is hidden. If we want to discover the latter, we have to go beyond the dimension where the former is located. In the above two experiments, the same high-dimensional object formed two low-dimensional projections. The two appear to be independent in the lower dimension, but in fact they are interrelated in the higher dimension. Bohm’s holographic universe theory reveals that we who are understanding CPS have to elevate the dimension through a virtual-physical mirror system, so as to better control the physical space. Moreover, given the network storage capacity built into the virtual space, the shadow of the physical space can be permanently preserved and scanned back and forth along the timeline. By analyzing the past, the future state of the physical object can be predicted. 7.3

CPS and Industry 4.0

The importance of CPS can also be recognized at the level of the history of industrial change. It can be said that mankind has experienced a total of four industrial revolutions so far, which can be called Industry 1.0 to Industry 4.0, respectively. In Industry 1.0, mechanical production equipment was driven by water and steam power; in Industry 2.0, electricity brought about the invention of the assembly line and the division of labor and mass production became a reality; in Industry 3.0, programmable logic controllers emerged and production was automated through the application of electronics and IT systems; and in Industry 4.0, CPS came into its own.

59 David Bohm. Wholeness and the Implicate Order. New York: Routledge. 1980/2002, 240. (For the Chinese translation, see Wholeness and the Implicate Order. Dingguo Hong, et al. (trans.). Shanghai: Shanghai Science and Technology Education Press. 2013.)

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Some research results of China, such as the Thematic Research Report on Industry 4.0 in 2015 by Analysys,60 explain CPS as the foundation of Industry 4.0. We believe that this description is not quite accurate. Internet, IoT, cloud computing, and big data are all relatively independent basic technologies, which are integrated deeply by CPS, forming the ultimate portrayal of the new economy. The Internet + is the application, Industry 4.0 represents industrial upgrading. If CPS is the headrope of the fishing net, both application and industry are the meshes, so if you lift the headrope the meshes spread open. In fact, the potential of CPS for the effective management of future society goes far beyond manufacturing and industry and commerce. For manufacturing alone, we need to think outside the box, not from the physical, but from the virtual, and get used to seeing manufacturing from the perspective of information science. In the case of the Internet of Vehicles (IoV), which is attracting more and more attention, it is usually thought that the IoV is a large system network of wireless communication and information exchange between vehicle and vehicle, vehicle and road, as well as vehicle and pedestrian and Internet, based on intra-vehicle network, inter-vehicle network, and in-vehicle mobile Internet, in accordance with the agreed communication protocol and data interaction standards. It is part of the IoT, allowing information about the vehicle to be connected to the existing Internet, and allowing different control terminals such as cell phones to be connected to learn information about the vehicle. Upon the collection and sharing of car information, it can perfectly realize the communication between vehicle and vehicle owner, vehicle owner and vehicle owner, and vehicle owner and third-party service provider, making car life more intelligent. These understandings are not wrong, but they are far from enough. Because they are still more limited to the physical thinking of the automotive industry. If we look at the physical from the virtual, why cannot we regard the vehicle as a medium? According to McLuhan’s theory, the medium is the extension of the human body, then we can think of the vehicle as an extension of the whole human body’s vision, hearing, limbs, and mind, and we can realize the functions of communication, entertainment, transaction, education, etc. through the IoV, and the IoV thus

60 Analysys. https://www.analysys.cn/article/detail/8954. May 14, 2015.

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promotes the formation of the vehicle medium. If we take the family home as the largest media consumption space, then IoV can make the vehicle become the second media space after the family. Within this space, what matters is not the hardware, but the software, or rather the software driving the hardware. Looking ahead, the major direction and strategic significance of CPS mainly lies in the networking and informatization of the modern manufacturing industry. This is the area that Chinese manufacturing enterprises need to tackle, and also a key step for China’s manufacturing industry to achieve strategic international status. CPS will certainly combine with all major industries to form a fresh impetus to pull economic growth and optimize industrial structure, bringing China’s manufacturing industry into the next new world of great development.

8

Manufacturing and the Internet Must Be Integrated

Manufacturers must digitally transform from multiple perspectives: efficiency gains, automation, customer orientation, and taking advantage of the benefits of data across the manufacturing value chain to create new revenue streams.

8.1

How to Redefine Traditional Manufacturing

The recently discussed hardware renaissance or hardware revolution, or many other synonyms, such as the new industrial revolution or even the IoV, all involve how to redefine hardware, and therefore how to redefine manufacturing. Of course, what we now recognize as hardware, such as independently designed, startup-developed, consumer experienceoriented smartphones, health trackers, and wearable devices, as well as drones, industrial robots, and 3D printers, are actually already very different from traditional hardware. We find that these hardware are not made by traditional hardware manufacturers, but by so-called Internetminded companies. This brings us to a question: What is the difference between the hardware made by the company with Internet thinking and the hardware produced by the traditional manufacturing industry? We used to focus

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more on manufacturing, but now it is all about creating, with the core being user-led. The user resources of traditional manufacturing are dead, while today’s Internet user resources have a diffusion effect, which is why the new hardware revolution is being initiated by makers, and products made in this way will replace traditional lifeless products. Products of the new era are created, not produced, thus we call the new hardware revolution the “maker movement.” 8.2

The Manufacturing Industry and the Internet Should Accommodate with Each Other

The changes brought by the Internet are not confined to the Internet industry, but will gradually penetrate into the industries that really constitute industrial technology, so it is not possible to simply discuss many of the issues of the high and low ends of various value chains. However, many times manufacturing is still not understood outside of traditional models, such as having original equipment manufacturers (OEMs), original design manufacturers (ODMs), or brand owners release the low-end value while retaining the brand and service network, and then moving production work to lower-cost processing regions of the world. All of such strategies that used to work effectively are a thing of the past in today’s context. The explorations of upgrading the manufacturing industry from different angles, such as the “vacating cage to change bird” strategy (transferring some low-end industries and industries with relatively low added value from big cities to surrounding areas) proposed by Guangdong Province of China, are all thinking about manufacturing in an old fashioned way. Essentially what we should explore is not a simple matter of upgrading, but a complete disruption. Negroponte, the author of the book Being Digital, which I translated in 1996, had distinctly introduced a pair of concepts—atoms and bits. The basic structural element of our society has changed from atoms to bits. If you project this insight onto manufacturing, you will see a huge difference between the rate of change of bits, which is geometric, and the rate of change of atoms, which is just arithmetic. From this perspective, innovation in manufacturing is far from the success we all expect. While the speed of bits is increasing by leaps and bounds, the speed of atoms is very slow, similar to the tortoise in the tortoise and the hare race. To resolve this speed paradox, one needs to imagine whether it is possible to have more bits in atoms, and more atoms in bits. Hardware

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and software, and atoms and bits can no longer be separated as they once were. The manufacturing industry in the Internet era has to use software thinking to transform hardware, and to iterate on hardware as fast as it does on software. Also, it is important to realize that a lot of hardware will be replaced by software, for example, the App may replace some functions of the hardware. In this way, the slow speed of the atom like a tortoise will be raised to the speed of a hare, eventually realizing mutual enhancement of hardware and software. American digital thinker and entrepreneur Chris Anderson sums up what we are seeing now as “atoms are the new bits, and bits are the new atoms.”61 This proposition can be analyzed in two ways: on the one hand, it is caused by the maker movement, which applies the innovation model of the Internet to the atomic world, making specific hardware manufacturing a hot spot for disruptive innovation; on the other hand, as inventor and investor Marc Andreessen says, “Software is eating the world.”62 Specific hardware devices can be replaced by software applications, making software a hot spot for disruptive innovation as well. These two trends can be referred to as the “bitization of the atom” and the “atomization of the bit,” respectively. When these two trends occur simultaneously, the scenario predicted by Kevin Kelly arrives: “In a poetic sense, the prime goal of the new economy is to undo - company by company, industry by industry - the industrial economy.”63 8.3

The Dialectic Between Bits and Atoms

As we mentioned “atoms are the new bits, and bits are the new atoms,” there is now a living example. In the Internet industry, almost everyone knows the law of the long tail, but Chris Anderson, who put forward this law, has left the Internet and entered the field of hardware, exploring the possibility of hardware by making drones with new thinking.

61 Chris Anderson. In the Next Industrial Revolution, Atoms Are the New Bits. Wired.

https://www.wired.com/2010/01/ff_newrevolution/. Jan. 25, 2010. 62 Marc Andreessen. Why Software Is Eating the World. The Wall Street Journal. https://www.wsj.com/articles/SB10001424053111903480904576512250915629460. Aug. 20, 2011. 63 Kevin Kelly. New Rules for the New Economy. Chapter 8 “No harmony, All flux”. https://kk.org/newrules/newrules-8.html. 1998.

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Anderson’s approach is to build a community of avid drone enthusiasts to discuss the possibilities of drones, design drones, and remark on the products. This is tantamount to importing the wisdom of the community into his R&D. On the production side, he has built a factory in California and one in Mexico to leverage outsourced resources, with the factories relying on a supply chain that is sourced globally. For example, he buys engines from Shenzhen through Taobao or 1688.com, and as long as the price/performance ratio is good enough, these engines can be added to the supply chain of drones. This is very typical of the process of exchanging bits and atoms. In the past, we tended to bifurcate atoms and bits. Companies built on bits and bytes, like most Internet/software companies, are bit-based businesses, including WhatsApp, Facebook, and Twitter. Innovation in this space has been accelerating. Companies built purely on matter to produce visible physical products are atomic businesses, such as Ford, Coca-Cola, and General Electric, and innovation in this area has been slowing down. However, bits and atoms have not always been so distinct. Companies in the third category combine the best of both sides of the atomic and bit worlds to develop the most successful products and services. Apple, for example, has both a software and app store and produces phones and computers; Amazon makes money on its information and technology platform, but its inventory and distribution business is unabashedly atomic. Today, the most interesting startups seem to be located at the intersection of the two, and they use bits to manipulate atoms. Uber combines cabs with ride-hailing software; SpaceX is in the rocket business, yet its rockets would not move an inch without its control and launch software. When the Internet era first began, we used the information superhighway to constantly convert atoms into bits. For example, books were converted to Kindle; CD and DVD players and Walkmans were converted to iTunes; cash became PayPal account or Visa card; Netflix replaced Blockbuster; digital images eliminated camera film; news began to be delivered by Facebook and Twitter; and college courses moved to online classes. Those who took advantage of these opportunities have been incredibly successful. As digitization, intelligence, and automation continue to advance, we are finally having to gnaw on the hard bone of converting bits to atoms. All microprocessors, drones, biotechnology, robotics, 3D printing, etc.

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involve the highest regulatory demands and prohibitively high conversion costs. But challenges often come with value. The world’s most valuable resource is now no longer oil, but data. Or it could be said that data in the twenty-first century, like oil in the nineteenth century, is an underdeveloped and valuable asset. Also like oil extractors, those who see the fundamental value of data and learn to extract and use it will reap great rewards as it is tied to the overwhelming dominance of the customer experience in the Internet era. For manufacturing, it is important to make products more valuable by feeding them with more data and information. In addition, the fourth industrial revolution will be largely a convergence of bit and atomic technologies. The toughest problems are always about atoms—they exist in a multitude of real problems (climate change, food shortages, environmental pollution, et cetera). Bits, on the other hand, will be the tool to solve these problems. Ultimately, a bit without an atom is water without a source or a tree without a foot. Combining the almost limitless potential of bits with the tangible world of atoms may not only create new products and new business models, but will also open up new ways of living, working, and being with each other, which is the driving force behind the future path of humanity. 8.4

The Impact of the Internet of Everything on Manufacturing

I call products with more information and data “big products,” and all “big products” are intelligent. The proliferation of intelligent products has reached a tipping point. Products with wireless connectivity (from light bulbs to thermostats, and to speakers) are increasingly found in people’s homes today. The manufacturing of these connectable devices is also intelligent. The IoT makes heavy use of connected sensors and smart devices, and uses these technologies directly on the manufacturing floor to collect data to drive artificial intelligence and predictive analytics. The more data an industrial device generates, the greater its potential business value. IoT can transform the traditional linear manufacturing supply chain into a dynamic, interconnected system known as a digital supply network (DSN), which can more easily integrate ecosystem partners. Once a DSN is in place, the way products are made and delivered will be transformed,

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resulting in significant factory efficiency gains, not only in terms of significant cost savings, but also in terms of greater safety for the human operators in the factory. For example, if a machine breaks down, connected sensors can automatically identify the fault and trigger a service request. Perhaps more importantly, IoT can also help manufacturers predict when a machine will break down or enter a dangerous operating condition. Sensors analyze a given machine’s sound frequency, vibration, and temperature to determine if it is operating in a normal state. Before IoT technology was available, it would have been time-consuming for human operators to perform this process manually. And by using sensors to collect and quickly analyze data points in the cloud, prediction becomes much easier. This turns traditional maintenance into predictive maintenance, enabling factories to reduce equipment downtime and improve safety through proactive maintenance. With less downtime and less waste, factories can make better use of capacity, resulting in significant improvements in operational efficiency. Another huge advantage of IoT is location tracking. In the past, workers may spend a lot of time looking for tools, equipment, and finished product inventory, but IoT has shortened these times. This all sounds wonderful, yet the disruptive effects of the Internet cannot be ignored. While improving efficiency, productivity, and security, the industrial IoT may also disrupt a company’s original business model. In the near future, you would see high-value equipment (from robots to aircraft engines) being increasingly rented rather than sold directly. Imagine high-value equipment with built-in sensors that can be remotely monitored and automatically maintained, repaired, and upgraded. In this way, manufacturers can simply focus on the job at hand without worrying about the condition of the equipment they are using. It thus appears that manufacturers must digitally transform from multiple perspectives: efficiency gains, automation, customer orientation, and taking advantage of the benefits of data across the manufacturing value chain to create new revenue streams. Together, these constitute the key aspects of digital transformation in manufacturing.

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9 Four Challenges in Digital Transformation for Enterprises Digital transformation is closely related to customer orientation and customer experience. It is a realization that the customer is at the center of all business activities.

9.1

A Matchup Where the Big Companies Do Not Have the Upper Hand

In this period of unprecedented change, companies of old will invariably encounter transformation issues. The root of the transformation lies in the fact that companies face two kinds of changes: changes in market structure and changes from technology. In response to these two kinds of changes, a series of shifts in management, marketing, and investment are required. According to Clayton M. Christensen and some others, this transformation can be seen as a market confrontation between large incumbents and entrants.64 The former, because of formal and informal resource allocation processes within the company, find it difficult to focus sufficient energy and manpower on those small markets, even if they will logically get large one day; moreover, these companies will also be held hostage by their users and will only be able to successfully execute incremental innovation, but cannot handle disruptive innovation. The entrants, on the other hand, are more focused on breakthrough innovation due to different financial incentives, with products that are more focused on user use rather than functionality. These lead to completely different technology S-curves for these two types of companies (An S-curve is a mathematical graph that shows the progress of a project over time). In the realm of disruptive innovation, new companies will almost always win, while older companies stay on top of incremental innovation. There are countless examples of new companies relying on disruptive innovation to defeat and even replace older ones. In the 1980s, steel giants underestimated the potential of microsteel mills; in the 1980s and 1990s, personal computers disrupted Digital Equipment Corporation, 64 Clayton M. Christensen, Michael E. Raynor, Rory McDonald. What Is Disruptive Innovation? Harvard Business Review. https://hbr.org/2015/12/what-is-disruptive-inn ovation. Dec. 2015.

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Wang Laboratories, and other small-machine manufacturers; in recent years, e-tailers have threatened the survival of brick-and-mortar retailers, and Airbnb and Uber have turned the lodging and travel markets upside down, respectively. Companies that expect a glorious past to protect them from the forces of change are doomed to fail. To escape this bad luck, the incumbents must rise up and transform themselves. In the process of transformation, they will face four major challenges. The first challenge is to develop a killer application. A killer application should have the following characteristics: A feature, function, or application of a new technology or product that is virtually indispensable to users or clearly superior to competitors; A non-incremental, innovative invention that can have a paradigmshifting, long-term, huge effect; The ability to give birth to new markets and patterns of behavior, destroy the old industry (hence the term “killer”), and rewrite or redefine the rules of the game for entire industry; The ability to greatly enhance platform capabilities, enhance network effects, and develop a large number of users, so as to reach critical mass. This challenge actually tests the ability of the incumbents to launch disruptive innovations. Disruptive innovation theory predicts that as the entrants confront the incumbents with better products or services, the latter will accelerate their innovation to defend their “turf.” Thus, it seems that the incumbents are basically on the defensive. The reason for this is that the incumbents often find themselves on the wrong side of megatrends. No matter how gratifying their balance sheets and market share (sometimes based on these very factors), the incumbents cannot seem to stem the tide. The good news for them is that many industries are still in the early stages of digital disruption. The precedents of the media, music, travel, and lodging industries provide increasingly valuable illustrations of transformational paths. If you want to respond forcefully to change, it is not too late.

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As a first step, leaders of established companies must commit to a series of initiatives to nurture small business units that have the potential for growth and represent the future. Think of them as new businesses nurtured by venture capital that will only pay off if they scale rapidly. To achieve the required acceleration at this stage of the game, established companies must be bold and relentless in reallocating resources from the old model to the new one, and demonstrate a willingness to adopt a different (often separate and independent) approach to running the new business. It is only in this context that killer applications can be developed. The second challenge comes from the “decoupling” of the organization. As shown above, mainstream companies are not inactive in all disruptive innovations. In one scenario, mainstream companies can even succeed: a new, independent, autonomous organization is created internally around the breakthrough business. This autonomous organization is free to allocate resources in order to win in disruptive new markets. For the incumbents, the problem is how to move from a tightly coupled business to a loosely coupled one. Tight coupling means that the components are more interdependent and require more coordination in activities, and all work is done within the organization; loose coupling means that there are many independent entities or individuals within the organization, with less interdependence and more sharing relationships, and many operations are outsourced. I call this process from tight coupling to loose coupling “decoupling.” In my opinion, organizations in the twenty-first century need to maximize the distribution of power and functions so that they are very malleable and durable at the same time. This challenge can be analyzed using Gary Hamel’s framework of the two functions of management. According to Hamel, the most important aspect of management is to address two issues: first, on the vertical axis, how to amplify human capabilities by providing the right tools, incentives, and working conditions; second, on the horizontal axis, how to aggregate human capabilities to do things that individuals cannot do. In the past, amplifying human capabilities required diligence, intelligence, and initiative, but today the key to determining whether a company is competitive is the creativity and passion of its employees. How can individual capabilities be aggregated? Pooling, standardizing, sequencing, integrating, and

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optimizing require more and more aggregation of actions in that order (see Fig. 1).65 Although the tools and methods of modern management were invented to solve the problems of control and efficiency in large organizations, we can set the goal of management even higher: organizations exist primarily to expand human creativity and to help people achieve from many sides. However, no one can develop and produce complex products, such as cell phones or antiviral drugs, on their own; most products and services require the integration of the skills and expertise of many people. Thus, the fundamental task of management is to achieve cooperation and coordination among many individuals while maximizing the release of individual creativity to create and deliver products and services.

Amplify human ability

Passion

Creativity Initiative Intelligence

Optimization

Integration

Sequencing

standardization

Essence of Management

Convergence

Diligence

Aggregate human capabilities

Fig. 1 Two dimensions of effective management

65 Gary Hamel, Bill Breen. The Future of Management. Harvard Business School Press. 2007. 250–252.

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So, is it possible to resolve this eternal pair of contradictions in management during the transformation process? How to achieve both amplification of individual capabilities and coordination between individuals? The essence of meeting this challenge is to create fully networked organizations. Traveling only on the vertical axis is the traditional market model, relying on markets for efficient and adaptable systems for aggregating information and allocating resources. Traveling only on the horizontal axis implies traditional bureaucracy. Most rules, incentives, budget systems, strategic planning systems, human resource management systems, and product development processes in modern management are concrete manifestations of bureaucracy, which curbs individual entrepreneurship and responsiveness, but whose basic purpose is to align individual interests with organizational interests. Market-based and bureaucratic systems each have their drawbacks, so there must be a third path: a real-time distributed network that combines the advantages of markets and bureaucracy, i.e., both increased individual creativity and aggregation of many efforts through ubiquitous, real-time connectivity. The power of such a networked organization lies in its ability to empower individuals and facilitate coordination while avoiding the ineffectiveness of hierarchy and bureaucracy (see Fig. 2). A third challenge comes from digital workforce transformation. Technological disruption—digitization, automation, intelligence—is forcing companies to change the way they work. In this context, leaders must foster a culture of innovation and drive the workforce by increasing employee engagement, career mobility, and facilitating skills transformation. Digital transformation changes the way organizations think about how they create value for the end customer, so processes and structures must be reimagined and reshaped. However, this is not possible without a welleducated workforce. Technology certainly has an important role to play, but focusing on technology alone can lead an organization to an impasse where the chosen technology, rather than the people, ends up leading the decision making. So, technology alone is not enough; companies need to ensure that they educate and empower their employees throughout the value creation process. We often emphasize the customer experience, but also the employee experience cannot be ignored. Every interaction between a company and its employees is crucial. Do the technology tools provided

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Amplify human ability

Passion Market Network

Creativity Initiative Intelligence

Bureaucracy

Essence of Management

Optimization

Integration

Sequencing

standardization

Convergence

Diligence

Aggregate human capabilities

Fig. 2 The third path to the networked organization

by the company make it easy for them to do their job? Does the company’s culture make for a productive and dynamic workplace? Does the company provide adequate education and training in a timely manner to fill the skill gaps of employees? A positive or negative experience has the potential to increase or decrease the productivity that employees are supposed to bring to the business. Only companies that invest in their employees are committed to employees’ development and respect their ideas build loyalty and make change management easier to achieve within the company. Along with this, as a new generation of young people enters the workplace, the new workforce, known as the “social generation,” is becoming the mainstay of the workforce. This generation likes to connect with others, wants an open and social-friendly work environment, and expects colleagues and bosses to be approachable; they are happy to work on collaborative, team-based projects, and are eager for information to flow freely at all levels; they are masters of digital communication, good at multitasking,

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and energetic; they are socially conscious, and place more emphasis on work-life balance. As a result, the social generation have a completely different expectation of finding a job—it is more like finding their Mr./Miss Right or buying a house, through a search and matching process. In this sense, companies are faced with the challenge of shifting from a performance-based, structured approach to motivating the new generation of employees to one that enhances their employability and flexibility. Smaller business units require a completely different kind of employee, one who is likely to be non-revenue oriented, who values personal fulfillment and satisfaction, and who prefers to interact with a larger network community in society and have a full flow of information within the organization. Corporate transparency and agile feedback are critical for employees in the digital transformation. As technologies such as artificial intelligence, VR/AR, and big data analytics move into the business, it is critical for companies to utilize these new technologies for creating meaningful experiences that touch employees, customers, and others on a deeper level—and importantly, always connect people to people. The fourth challenge is the transformation of processes. Traditional hardware manufacturing has to go through a long process from specification setting, optimization of bill of materials and design to supplier negotiations, prototype manufacturing, pilot production, and mass production (which may take 18–24 months), and then finally marketing and sales to reach the user. Not surprisingly, such products have largely lost their value by the time they are developed. The interval between idea conception and user interaction is unbearably long, while the time and cost of product iteration are too high, which is the unbearable burden of traditional manufacturing. Now, the independent companies and startups that launched the hardware revolution have transformed their processes into “agile development”: open-source development at the design stage, followed by rapid prototyping and pilot production, then marketing and sales, and finally outsourced production and delivery to the user. This process transformation frees us from the old specification constraints, allows prototyping and final manufacturing to be decoupled, reverses the order of sales and production, and with increased mass collaboration and migration to the cloud, a manufacturing revolution is accomplished. The key to process transformation is to achieve a shift from customerbased to user-centric. This can be broken down into three areas. First,

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create “live” data about users and end the “disconnect” with them. The transformation of home appliance companies from appliances to “netware” is precisely in this direction. Second, strengthen the interactive thinking with the user as a real subject, depending on the product as a living, evolving organic matter, while replacing the division of labor thinking of the past operation with the joint labor thinking to solve the operation mode problem. Third, after getting the user data, we should learn how to attract traffic like an Internet company, because traffic is the guarantee of sales and the basis to improve user experience to form user stickiness. 9.2

Why Transformation

Most often, companies define digital transformation as a shift from traditional to digital. But this understanding is actually incomplete. Digital transformation is tied to customer orientation and customer experience. It is an awareness that the customer is at the heart of all business activities. Ultimately, transformation is about meeting the needs of the customer, not about meeting the needs of the business. As Mr. Zhang Ruimin, CEO of Haier, said, “The success of a company is always due to its adaptation to the needs of the times.” Throughout the development of the world’s enterprises, they first experienced the long era of production from 1900 to 1960, which was dominated by manufacturers such as Ford, Boeing and Sony, as mass manufacturing made industrial powerhouses successful; then it was followed by the era of distribution from 1960 to 1990, when global connections and transportation systems made distribution key and “channel is king” became the loud slogan; from 1990 to 2000 was the information age, when connected PCs and supply chains meant those who could control information flow dominated. From 2000 to the present, with the full penetration of the Internet, we have entered the age of the customer, when empowered buyers demand a new level of customer obsession. In the age of the customer, supported by technology, customers have greater influence and higher expectations than ever before because they can access information about products and services in real time via the Internet. The ability of customers to access information quickly has triggered a dramatic change in the marketplace. This age represents a transition of power from businesses and organizations to customers,

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presenting unprecedented opportunities for customer-obsessed leaders and businesses. To fully meet customer needs, companies must forge more efficient ways of working that are richly connected, decentralized, analytics-driven, and automated. Today, we talk a lot about the possibility of artificial intelligence replacing people. With the adoption and development of robots, more and more jobs will be automated, especially those that are most repetitive. The loss of jobs is bad for employees; but the upside is that humans will no longer get jobs that are so monotonous and boring. Seeming paradoxical, the irrationality of human emotion is leading to a solution that can overcome the trend of automation replacing human labor. Automation leaves behind jobs that are best suited to people, jobs that value the human feeling more than the routine. This means that the future needs people who are wise, not intelligent. How can people be wise? The first thing is to let people enjoy their freedom. Ultimately, management is about human nature. For organizations to survive, they must somehow make a more substantial change in human management, especially as we enter the Internet age, which emphasizes freedom. So the road to transformation is also the road to freedom of wisdom.

CHAPTER 2

First to the Top: On Strategy

1

The Rise of Social Companies

Why are companies going social? Because we need a new model of relationship.

1.1

Why People Need to be Tenaciously Connected to Each Other

I have translated Clay Shirky’s Here Comes Everybody: The Power of Organizing Without Organizations (2008), the theme of the book is that, based on love, justice, shared preferences and experiences, people can transcend the barriers of traditional society, and flexibly and effectively connect with each other through new social tools such as instant messaging, cell phones, weblogs, and Wikipedia to share, collaborate, and even engage in collective actions together. Here comes the era of everybody. Humans are interdependent social animals, dating back to ancient times when individuals were connected to other people in a variety of ways. Why people need to be tenaciously connected to each other? We can find answers from different perspectives in various disciplines. Political science argues that as a political animal, individual human can establish a common system of governance only through collective consultation with others; otherwise, they would be subject to the law of the jungle. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 Y. Hu, Seismic Digital Shift, https://doi.org/10.1007/978-981-99-5953-2_2

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Economics, on the other hand, emphasizes the necessity of division of labor: with the development of social division of labor, there is also an interdependence of people in the provision of goods and services. This implies that the production of wealth and the birth of market exchange relations are not the result of isolated choices made by individuals. All market exchanges produce their externalities, which do not affect only the buyer and seller. Such externality must be managed collectively by the community. From the perspective of the individual human, there is a period of time in the life course of each person when he or she is particularly dependent on others. Why is it that dolphins can swim and horses can walk at birth, while infants can do almost nothing without the hard work of their parents to nurture them? In 1995, anthropologists Leslie C. Aiello and Peter Wheeler proposed the “expensive-tissue” hypothesis.1 They argue that the brain is the most complex and important part of our body, and that during human body development, the brain “steals” most of the body’s energy, which causes delays in the development of other organs. In any case, adults must accept the dependence of infants, because no infant can survive on its own. However, human society is also characterized by the fact that we are caregivers at some times and the cared at others, because everyone will eventually reach old age. Unlike infants, the elderly, after decades of living independently, often have difficulty adjusting to being dependent on others again. Here, the change in inherent perception lies in believing that their dependence on others is justified. Ultimately, we are also in an interdependent relationship with nature, which nourishes us and for which we have a responsibility. By taking responsibility for the natural environment, we are also taking responsibility for the next generation. All of this suggests that what makes humans social creatures is not accidental, but has always been so.

1 Leslie C. Aiello, Peter Wheeler. The Expensive-Tissue Hypothesis: the Brain and the Digestive System in Human and Primate Evolution. Current Anthropology. 1995, 36(2): 199–221.

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Networked Individualism

Thanks to the Internet, for the first time in human history, we have communication tools that support group dialog and group action. Gathering a group of people and making them act would have been extremely demanding of resources, bringing worldwide group effort under an institutional monopoly. Today, the tools of global sharing and cooperation have finally been placed in the hands of individual citizens. The old monopoly is thus broken, and a new organizational form is emerging. In recommending the book Here Comes Everybody: The Power of Organizing Without Organizations, Pony Ma said, “The organizational form we are used to in the traditional industrial economy is becoming increasingly inadequate, and we need to find a new model of relationship.” He hits the nail on the head. We are witnessing the rise of social companies. Sociability is one of our core competencies, and it appears as both a cause and an effect in almost every dimension of our lives. Society is not only the product of individual members, but also the product of group composition. The aggregation of individuals and groups, the aggregation of individuals within groups, and the aggregation of groups and groups together form an extremely complex network. The centrality of group activity in human life signifies that any change in the way groups function will have a significant impact on many areas, including business, politics, media, and religion. New social technologies make possible the formation of new types of groups. Gaining the freedom and ready participation of a large and dispersed group has gone from impossible to easy. How can new social technologies be used in organizations to change the old patterns of resource allocation and human mobilization in order to expand full participation and enable more collaboration? In recent years, the term “social” has become extremely popular because at the technical level, software has become social. Social software, in contrast to its name, is first and foremost personal software, a tool for personal networking. The emergence of social software marks the beginning of the transformation of the Internet application model from the traditional “human–computer dialog” to “human-to-human dialog.” If we give a brief overview of social software, it features the following characteristics. First, it is an easy-to-use tool and service using open standards. Second, it can create social affordance through network effects, which allows human needs for social interaction to be greatly satisfied,

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and does not replace daily human communication but amplifies it. Finally, its use can lead to a networked individualism. Networked individualism represents a shift from the classical model of social arrangements around hierarchical bureaucracies or tightly knit social groups to interconnected networks of individuals, thanks to the means provided by the development of information and communication technologies. In such personal networks, the hub is the individual, rather than the family, work unit, community, or social group. Although the shift to networked individualism began before the advent of the Internet, the emergence of social networks has greatly facilitated this development. The key here is how to move from a group-based society to a networked one. In business, for example, workers (in this case professionals, skilled workers, and managers) are increasingly demanding more discretion in how they work. They may work at cross-purposes with multiple colleagues and report to multiple supervisors, rather than staying within just one work unit. Management through networks is replacing management through hierarchal trees or matrices. Participants are inherently burdened with multiple loyalty relationships, and their commitment is no longer singular. Each person wears multiple hats on several projects and task forces. In the workplace, people often collaborate with colleagues who are distant rather than sitting close by. Zooming in on the company as a whole, it is becoming increasingly difficult for companies to get self-sufficient. Companies are often linked into complex networks, in order to communicate with allies and even potential competitors. Sometimes members of different organizations form a temporary virtual organization to deal with a specific problem or respond to a market, while retaining their membership in (and loyalty to) their original organization. Group-based societies are more like small boxes that are closed, bounded, and rigid; networked societies are open, permeable, and flexible. In the latter, each person is not integrated into a group with others around him or her, but has his or her own personal network. Most people move locally within multiple communities, operating changing networks of relatives, neighbors, friends, and colleagues. These activities and relationships are often informal, rather than structured and organized. Each person obtains information, collaboration, orders, support, sociability, and a sense of belonging by operating his or her own network separately.

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All information-based work organizations that operate on bits rather than atoms are shifting to networked individualism. The work relationships within the organizations are decentralized, often spreading across cities, provinces, countries, and even continents. Social software provides the flexibility needed for interaction in networked organizations, virtual organizations, and online communities, where physical context becomes less important. 1.3

Platformization of the Companies and Datafication of Users

Networked individualism is not the individualism that preaches solitude; it is supported, rather, by collective wisdom. Tim O’Reily, the originator of the term Web 2.0, defines the term by saying, “A true Web 2.0 application is one that gets better the more people use it. Google gets smarter every time someone makes a link on the web. Google gets smarter every time someone makes a search. It gets smarter every time someone clicks on an ad. And it immediately acts on that information to improve the experience for everyone else. It is for this reason that I argue that the real heart of Web 2.0 is harnessing collective intelligence. And it is for that same reason that I argue that Web 2.0 represents not just a turning point for the computer industry but for the world as a whole.”2 In addition to collective intelligence, there are collective resources. The best practice of this is P2P. The essence of P2P services is that each client is at the same time a server; each node is at the same time a hub. To make full use of collective intelligence and collective resources, it is necessary to create an information-based work organization. This can be done on several levels, including strategic positioning, user positioning, and core competencies. The company’s strategic positioning dictates that platformatizing the company is a very important prerequisite. In 1984, John Gage, cofounder of Sun Microsystems, made the famous statement that “The network is the computer.”3 It took 20 years for the industry to recognize the power of this statement.

2 Tim O’Reilly. My Commencement Speech at SIMS. http://radar.oreily.com/2006/ 05/my-commencement-speech-at-sims.html. May. 14, 2006. 3 John Graham-Cumming. The Network is the Computer: A Conversation with John Gage. Cloudflare. https://blog.cloudflare.com/john-gage/. June. 11, 2019.

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Rumor has it that in the days of the mainframe, Thomas Watson from IBM made a prediction that would be laughed at for generations to come: “The world will only need five computers.” Although it is attested that Watson did not say this, more than one professional did think so in the early days of computer development. We all know now that they were wrong. Since then, hundreds of millions of personal computers have been sold on the market. But we were wrong about the reason for their erroneous prediction. The error in this prediction was that the number of computers was inflated fourfold. When working on the Internet, we only need a huge computer with infinitely expandable energy. Drawing on this famous statement, in business management we can make a claim: “A company is a platform.” Or, once we had companies, now we only have platform-based businesses. Platform means, first of all, a digital business; secondly, a business with many developers and followers, both internally and externally. The Research Report on the Future of Platform-based Organizations released by Boston Consulting Group and Ali Research Institute summarizes the Internet-based platform model as “big platform + small front end + rich ecology + common governance.” At the macroeconomic and meso-industrial level, platform is “actually a way to reorganize and integrate multiple industries and even the whole society’s resources.” At the micro-level, as Nobuyuki Idei, former chairman of Sony, said: “The core competence of the new generation of Internet-based companies lies in the use of innovative models and new technologies to approach consumers, deeply understand consumer needs, efficiently analyze information and make predictions, while all traditional product companies can only be reduced to the subordinate of such new user platform-based business, and their decline cannot be reversed by management.”4 The so-called user orientation can be understood as user datafication. Every major Internet application, past and present, is driven by a specialized database, like Google’s web crawler, Yahoo’s catalog, Amazon’s product database, eBay’s seller database, MapQuest’s map database, Napster’s distributed song library, and so on. Data management is a

4 BCG & Ali Research Institute. The platform-based organization: A “foreword” to the frontiers of organizational change. http://image-src.bcg.com/Images/BCG_Future_ Platform_Organization_Sep_2016_CHN_Final_tcm9-124495.pdf. September, 2019.

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core competency of platform-based companies, so important that sometimes these programs are called “infoware” and not just software.5 To gain a competitive advantage, a company should seek to control unique, hard-to-recreate data sources, and the more users, the richer the content. Where the cost of creating data is huge, there may be an opportunity to win with a single data source, as with the Intel Inside approach. In other cases, the winner will be the company that reaches critical mass through user aggregation and incorporates the aggregated data into system services. Just as the growth of proprietary software led to the free software movement, in the next decade we will see the growth of proprietary databases lead to the free data movement. And to build core competencies for the new era, companies will need to practice a new set of rules: Focus more on selling services rather than selling hardware or packaged software. Google, for example, never sells or packages its programs, but benefits as a service. Customers pay Google directly or indirectly for the services they use. Apple is trying to increase its service revenue beyond hardware to avoid the volatility that comes with the hardware lifecycle. Leverage the long tail. Companies need to leverage their customers’ self-service and algorithmically managed data to extend across the Internet, to reach the edge and not just the center, and to reach the long tail and not just the head. Pivot with viral marketing. It has become almost axiomatic that the great Internet successes do not actively market their products. They pursue viral marketing, where referrals spread directly from one user to another. If a product or service relies on advertising to get the word out, you can pretty much assume it’s not coming from a user platform company. Build engagement structures smartly. People tend to create links to additional content they like on their websites or apps, rate songs or show off their knowledge online in product reviews, and it is easy for them to share what they like with others. Whatever project is launched, it should be constructed with a very small core, a well-designed extension mechanism, and a way to allow anyone to add any component that fits, to realize

5 Tim O’Reilly. Hardware, Software, and Infoware. In Chris DiBona, Sam Ockman & Mark Stone (eds.) Open sources: Voices from the open source revolution. O’Reily Media, 1999.

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the network effect. The network effect, derived from user contributions, is the key to market domination in the platform era. Make operations a core competency. Expertise in product development must be matched with that in day-to-day operations. For example, Google’s systems management may be more valuable than its search algorithms. Finally, trust users as co-developers. This is derived from reflections on open-source practices. In contrast to the open-source motto “release early and release often,”6 the motto of Web 2.0 is “the perpetual beta.”7 Products are developed in an open state, with new features being added at a monthly, weekly, or even daily rate. As a result, monitoring user behavior in real time to see which new features are being used and how they are being used will become a core competency. As Zhang Ruimin says, “A business is either a platform or owned by a platform.” And the key lesson of platforms is that users can add value. 1.4

The Need for Agile Enterprises

Disruptive technologies and consumer empowerment are expediting the entire marketplace, and platform-based companies must become more agile to ensure their survival. Without the ability to create an operating model that pursues innovation and agility, there is no way to adapt, compete, and grow a business. For this reason, companies have to be ready to disrupt current strategies in order to continuously keep pace with the market. Today, we need to make business decisions all the time, and the old hierarchical structure is too outdated to process information quickly. An agile enterprise is also known as a real-time enterprise. Time is being lost in all organizations: time to get information, time to respond to market demands, time to make decisions… Many organizations waste this time because they follow processes that were established years ago without recognizing that what worked then can trigger deadly delays right now. Companies that lack immediate processes and up-to-date information pay 6 Eric S. Raymond. The Cathedral and the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary. O’Reily Media. 1999. 28–33. 7 Tim O’Reilly. What is Web 2.0: Design Patterns and Business Models for the Next Generation of Software. https://www.oreily.com/pub/a/web2/archive/what-is-web-20. html?page=1. Sep. 30, 2005.

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a steep price: being forced to cope with rising costs due to inefficiencies, missing valuable business opportunities, and falling behind competitors. We use an real-time enterprise cyclone model to show how a company’s waste of time can be corrected. The cyclones are divided into three groups: the first group is called leadership processes, the second is management processes, and the third is operational processes. The leadership processes have two cyclones: capital into capability and stimulus into strategy. The management processes cover four cyclones: threat brings response, concept becomes concrete, goal turns into organization, and result drives response. The operational processes span four cyclones: procure to pay, order to cash, service on demand, and resources on demand (see Fig. 1). The ten cyclones are interlocked one by one, with each of them corresponding to matching practical operations; and there can be a huge waste of time in each of these operational sessions. For example, whether a new and improved business strategy can be developed quickly in the face of external or internal stimuli; how quickly an effective response to a threat is possible; how long it takes to turn an idea into a product or service, assuming the company comes up with one; and so on. Disregarding wasteful steps, these processes can be broken down into steps such as supply chain management (supplier selection, contracting and feedback mechanisms), sales order management (order processing, shipping, bookkeeping, cash management), tactical marketing (advertising, customer acquisition, customer information and customer service delivery), and internal value creation processes (including planning, setting schedules, allocating resources, and leveraging assets). The three groups of processes are connected layer by layer to advance people, culture, skills, organization, and work structure in a series of goal-oriented initiatives. But eliminating all kinds of waste is not enough to address the need. The ultimate core of building an agile enterprise is to guide the enterprise into a state of self-organization. On balance, how can a company become agile? The answer is that a bottom-up state of organization must be developed. Hierarchy has to give way to self-organization. This means that control and decision making no longer come solely from the top; individual teams must be empowered to practice. This does not equate to chaos and anarchy or a complete lack of planning; rather, it means inspiring local action on the basis of global goals. Each team must be equipped with tools, motivation, and empowerment to be the best team it can be.

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Capital to capability Stimulus to strategy

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Threats to responses Concepts to concrete Goals to organization Results drive response

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Purchase & payment Order delivery Services on demand Resources on demand

Fig. 1 Real-time enterprise cyclones

In the framework of self-organization, a company can experience a radical change in the whole process of management compared to what it had before when dealing with a business problem. From the moment a problem is identified, the company initiates a closed-loop process of experiential feedback, at the heart of which is the social innovation capital within the organization. The closed loop begins with the mobilization of knowledge to solve the problem. In the process of problem-solving, individuals learn on their own while forming teams in the company to drive team learning, so that individuals and teams work together to discover solutions to problems. Once the problem is solved, the company should accumulate this knowledge into a knowledge base, and then share and spread the knowledge base to reserve knowledge for new problems that may arise in the future. Such a knowledge base of innovation capital ensures that the company is invincible in the face of various business challenges.

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We categorize the agility of an agile enterprise into three types: the first is called strategic agility, where the key is how to identify and seize game-changing opportunities; the second is portfolio-wise agility, with the ability to shift cash, talent, and management focus quickly and effectively from less promising business areas to more attractive ones; and the third is operational agility, where one knows how to exploit opportunities within focused business models. It is dangerous for a player in volatile market to rely on only one type of agility. Only by developing three types of agility can a truly good agile enterprise be developed. By building their organizations to be strategically, portfolio-wise, and operationally agile, business leaders can make their businesses invincible, regardless of the turbulence they encounter. Traditionally, the business leader is often regarded as a captain, holding binoculars to gain insight into the future, establishing long-term vision, and pushing forward unswervingly. Today, however, the norm is more like the leader navigating the crew through the impenetrable fog that shrouds the entire future. Perhaps we should reject the metaphor of captain because it tacitly obeys the traditional view of the leadership— in the corporate pyramid, the captain-like leader was at the top of the tower, in control and giving orders. Today’s followers are more autonomous and bolder, so that leaders rely heavily on persuasion and advice to take control, and orders are no longer effective. This is similar to the historical shift in marriage and politics, where a shift in power is evident—from an unequal balance of power to a more democratic and just one. Today, when we talk about leaders, our role models are Martin Luther King, Nelson Mandela, and Mahatma Gandhi, whose compelling leadership came not from authoritarian orders but from persuasive mobilization. Leaders must strive to win their followers. Leadership is much more than an official position, but points to effectiveness and ethics. As James MacGregor Burns said in his famous book Leadership (1978), the purpose of leadership is “to meet human needs and expectations” and to repeatedly identify “the possibility of human will and common standards of justice in human affairs.”8

8 James M. Burns. Leadership. Harper & Row. 1978. 34.

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Beyond a Single Platform Strategy

All organizations must think in this way: not just about what they can create on their own, but also about the full value that is carefully orchestrated through collaboration in a broader ecosystem.

What does it mean to be a platform-based company? Is this a path that every company has to take today? Actually, it is more accurate to say that even if your business cannot be a platform, platform thinking is a must, because many dimensions of the economy have already been rewritten by the platform. Platforms are seen as the best way to succeed in today’s digital age. The problem is that the definition of a platform business is erratic. To make platform thinking concrete, we focus on two key elements of a platform, one of which is the openness of the platform, i.e., the opening of its own digital resources to all stakeholders. This is highlighted by the fact that platform businesses can profit from services provided by applications and application-level interfaces built on a scalable technology base that customers and vendors can integrate into their own operations and into their own products, and can further expand these businesses. In short, a platform-based business is a digital business that has many developers and followers tethered to it, both internally and externally. The more functional a platform is, the more it will attract good developers and loyal followers. Of course, for these people to invest their time and energy in building and supporting the platform, they must see the value of their business. This leads us to another key element of the platform: stakeholders must win with the platform. Openness + win–win is the platform competitiveness. 2.1

The Six Rules of Open Platform

Open platform is a concept often talked about and a practice often engaged in the Internet industry. The mystery is that the more open something is, the faster it grows. But how does one become an open platform? In Macrowikinomics: New Solutions for a Connected Planet (2010),

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Don Tapscott and Anthony D. Williams present six rules, or six ways of working, that make a company an open platform.9 First, convert what you are trying to offer (whether it is a physical object or a service) into a platform around which others can self-organize and create new value, rather than having you create something yourself and guard it forcefully—as most organizations do. In other words, do not just be a creator, but also be a curator. Many organizations take the wrong approach to leveraging the Web. They take the same approach to creating all content—whether it is a website, a new product or service, or a new way to respond to customers. In any case, they will see themselves as the creators of content. However, to be successful in an open world, you cannot just see yourself as a provider of content, but you have to become a manager, able to create the environment or platform so that others can self-organize and create something of value—for you, for others, and even for the world. For example, if we publish a newspaper, the old-fashioned way is to tell readers what the important news is today, while the up-to-date way is that we create a place, or a community, for readers to communicate. By degrees, all organizations must think in this way: not just about what they can create on their own, but also about the full value that is carefully orchestrated through collaboration in a broader ecosystem. Second, in order to collaborate, you need to share some of your intellectual property, so you must master the art of sharing. This means that you need to clearly identify which parts of your business can benefit from disclosure and which parts you need to hold firmly in your own hands. Smart companies take advantage of “sharing” in a variety of ways: strategically shifting the playing field in their industry, getting closer to market faster, reducing R&D costs, generating valuable follow-on inventions, stimulating demand for complementary supplies, and developing relational capital with a community of collaborators. Of course, we are not encouraging companies to share everything—there is a range of options between open and closed. The interesting model is somewhere in between. Something can be built in a collaborative way, possibly shared with collaborative partners, or with ownership distributed accordingly, depending on the degree of openness. What is clear is that the future of

9 Don Tapscott, Anthony D. Williams. Macrowikinomics: New Solutions for a Connected Planet. Penguin, 2010. Chapter 18.

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collaborative innovation relies on such hybrid model where participants can both share and own. Third, in order to be able to take control of your future in this turbulent world, you also need to start with a paradoxical attitude—letting it go. Encourage people to solve your problems and generate new ideas through self-organization. Such letting-go may take many forms. Perhaps you need to give your employees more freedom and flexibility to innovate, and to do so with their colleagues. It could also mean getting ideas from your suppliers and partners and working more closely together on product design and production. Or, at least share some of your assets with the public to expand your business, or attract a larger network of contributors. There may also be a loyal and active community of enthusiasts who can help your brand grow with marketing campaigns planned by community members themselves. Fourth, even self-organization is inseparable from motivation. In any large-scale collaboration, the necessary leadership usually comes from a small group of passionate people acting as pioneers in the front. Therefore, it is important to reinforce this pioneering role and motivate them by offering rewards, recognizing their accomplishments, and promoting talented individuals to leadership positions. How can this pioneering spirit be reinforced within the organization or on a broader scale to promote community growth? A platform needs to be built for community members to innovate; intellectual property needs to be shared to provide a basis for them to make contributions; and they need to be free to flourish. Most importantly, provide incentives to motivate these pioneers to achieve their own success while creating value for the company. Witness their slow, step-by-step development with enough patience and tolerance, and treat collaboration as a real job, not a spontaneous act. Fifth, broaden and deepen the culture of collaboration within your organization. This is critical to creating a lasting change in the way organizations create value. Change the old hierarchy and develop a vibrant meritocracy where ideas and information can flow freely through the organization. In order for an organization to become a collaborative place, its leaders must make the decision to identify collaboration as an integral part of the business or company mission and require the entire organization to work toward this common goal. Resources need to be properly allocated to

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specifically ensure the most basic collaborative behaviors. This need must be continually communicated to make enhanced collaboration successful and sustainable. Collaboration is not simply about the tools or the expense of implementing it within a company. For successful companies, it has to do with tribal, sociological, and cultural change. It means adapting to the people and processes involved—collaborating for the sake of achieving a goal, not collaborating for collaboration. Sixth, delegate to the “network generation.” Today’s young people are the first generation to grow up with an innate understanding of the digital world and its possibilities, so collaboration comes naturally to them. Smart leaders leverage the strengths of young people by delegating authority to them to help lead the reinvention process. Unfortunately, most companies do just the opposite. Instead of capitalizing on such youthful energy, collaborative instincts and passion for spreading new collaborative tools and new work habits within the organizations, they severely restrict them, prohibit them, and even declare them illegal. Many companies ban the use of social media during work hours, while the smart one are seeing that these tools and platforms are becoming the new-fangled operating system for their business. For the new generation, these tools are as natural as air. 2.2

Realization of Network Effects

Through open platforms, companies can not only offer their own services and functions, but also access and consume the resources of others. The biggest motivation for players in the platform economy is that everyone is looking for the “network effect” to spread their message and expand their sales well beyond their existing base. In an article in the MIT Sloan Management Review, David McIntyre suggests that seeking network effects takes different forms, depending on the company, industry, developer motivation, and users.10 According to McIntyre, network effects can be achieved in three ways to increase the success of a platform.

10 David McIntyre. Beyond a “Winner-Takes-All” Strategy for Platforms. MIT Sloan Management Review. https://sloanreview.mit.edu/article/beyond-a-win-ner-takesal-strategy-for-platforms/. Jan. 3, 2019.

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The “cross-end” network effect: platforms act as intermediaries between different groups of users or organizations that are difficult to interact with each other. For example, on a job search site, job seekers are concerned about their likelihood of being found by recruiting companies, and recruiting companies are interested in efficiently recruiting the employees they want. This effect is generated by the multilateral complementary goods or services in the network. Local network effect: For many platforms, users do not care about the total size of the user network, but rather about the presence of a few key players nearby. For example, on a ride-hailing platform, users derive value from the number of potential drivers in their neighborhood, and the size of the national driver population is of little concern to them. Informational network effects: The ability of people who view a product (and consume it) creates informational network effects for consumers. In this case, the value of the network is not reflected through direct transactions, but rather through the ease of access to information about prior transactions in the network or local information about the user’s network. The basic implication of the network effect is that those platforms with the largest networks of users provide the most significant value to participants. However, this is not universally true. For many platforms, characteristics other than total network size may be key to keeping the platform competitive. For example, platform users may care deeply about efficiently reaching specific groups or organizations on the other side of the platform, about the platform’s local capabilities or a higher quality subset of the platform’s users, or about placing more value on access to information about the network or its participants. As platform business models continue to gain attention in a variety of environments, recognition of the characteristics of the marketplace mediated by the platform is a prerequisite to developing an effective strategy. In many cases, you may not need to build the largest network of users, but rather a more nuanced platform strategy, because the reality of platform competition is not as simple as a “winner-take-all” story.

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Do You Need a Strategy?

What exactly is strategy to an organization? How useful is strategy?

Is the presence or absence of strategy a matter of organizational success or failure? First, let us look at a brilliant experiment: put six bees and as many flies into separate glass bottles, then lay the bottles flat so the bottom is facing the window, and see what happens. You will see that the bees keep trying to find the exit at the bottom of the bottle until they die of exhaustion or starvation, while the flies escape through the neck of the bottle at the other end in less than two minutes. In fact, it is the bees’ love of light that brings about their demise. The bees are convinced that the exit of the cell must be in the brightest place, so they keep repeating this logical action. Those “stupid” flies pay no attention to the logic of things, ignoring the attraction of bright light, flying around, and as a result, stumbling upon good luck—these simpleminded creatures are always saved in the place where the wise perish. Thus, the flies are able to finally find the exit and gain freedom and new life. Here, the bees seem to have a “strategy” because they stick to a certain “logic” that ends in death; the flies seem to have no “strategy” as they persist in trial and error, taking risks, improvising, and meandering, all of which help them cope with change. 3.1

The Absence of Strategy Also Has Its Benefits

What exactly is strategy for an organization? How useful is strategy? Or go back to the question at the beginning of this chapter: Is the presence or absence of strategy a matter of organizational success or failure? These are all difficult questions to answer. We have heard countless lectures about the importance of strategy to organizations, but I wonder how many people realize that there are benefits of absence of strategy. Like many things in the world, strategy is a double-edged sword. In Strategy Safari: A Guided Tour Through the Wilds of Strategic Management (1998), Henry Mintzberg et al. clearly state that both adoption and non-adoption of strategy and the strategic management processes are important to organizations.

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This is because, while strategy sets the direction, it can be like a blindfold that blinds one to potential dangers; strategy emphasizes collective action, but over-collectivization of action may lead to groupthink; strategy defines the organization, but it tends to make the organization patterned and lose the diversity of the entire system; strategy ensures consistency and order, while non-consistency is a source of creativity. Crucially, today’s business environment can suddenly go from normal to unpredictable, unimaginable, and incomprehensible, and the bees in the business may hit the “glass wall” at any moment. But this is not to encourage us to take a pessimistic view of the world. The way to deal with uncertainty is to invest things with rationality at the moment of transience, just like the flies in the experiment above. That is, if you want to “make sense” of a world that tends to be complex, you must have the wisdom of randomness and get rid of dogma. An example of random wisdom is the way the Labrador Indians in northeastern Canada roast deer bones to determine where to hunt. Why is that? Because hunting was an activity that the Labrador Indians performed thousands of times, they were able to accumulate a wealth of experience with game, tracking, weather, and terrain. Usually, they rely on the knowledge and intelligence of the experienced hunters to judge the direction of the hunt; however, when the variables of the outside environment increase or other special circumstances are encountered, the Labrador Indians put their experience aside and turn to non-logical “magic.” This is absurd and ridiculous in the eyes of modern rational people, but the magic of the Labrador Indians brings something new beyond experience, introducing a random variation to the fixed hunting pattern, so that hunting tactics do not stick to the rules and avoid the ineffective pursuit that may result from following rigid strategic patterns. The wise men, like the bees, are often caught in a dead end precisely because of their enthusiasm for “strategy.” 3.2

Strategy Is an Art

Some entrepreneurs are particularly fond of describing the strategies they have achieved in the last three or five years. You might ask them the following questions. What was your expected strategy three or five years ago? Is it the same strategy as the one that has been achieved? Some of them claim that their strategic intent was fully realized. This is not an

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honest statement. Some say that the achieved strategy has nothing to do with the planned strategy. This response is also not true. Strategy cannot be achieved satisfactorily, because that implies precise foresight. But in contrast, there is simply no strategy that can be achieved ramblingly. The vast majority of answers to the above questions fall somewhere between the two extremes, a mixture of both. Effective strategists have both a very high level of foresight and a very good ability to react to unexpected events, which is particularly evident in military strategy. The concept of strategy comes from the military, meaning the planning of war in general. The Chinese old adage “Work out splendid plans to win victories in battles a thousand miles away” precisely portrays the pivotal role of strategy in the final outcome of a battle. As the ancients said, “The great matter of the nation is the sacrifice and the military.” For a long time, war has always affected the survival of a country and nation, so the first chapter of Sun Tzu: The Art of Warfare (circa fifth century B.C.) says: “The art of warfare is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected.” Sun Tzu used the word “warfare” to summarize force and war, including the meaning of strategy, combat, tactics, and battle. Although he did not explicitly mention the word “strategy,” the general terms “plan,” “stratagem,” “tao,” “tactics,” etc., are considered by later generations as the prototype of the concept of strategy. The English word “strategy” is derived from the Greek word “strategos,” which means “the function of a general,” and by extension, “the art of commanding an army by a general.“ The English translation of the book title “Sun Tzu: The Art of Warfare” sees strategy precisely as an art, which is common to all military men of the past and present. Sun Tzu’s “The Art of Warfare” contains many references to “conditions,” the most famous of which is “Therefore, just as water retains no constant shape, so in warfare there are no constant conditions.” Sun Tzu used water as a metaphor, pointing out that “Military tactics are like unto water,” and repeatedly emphasized the concept of “conceal disposition,” saying in the chapter “Weak Points and Strong” that “In making tactical dispositions, the highest pitch you can attain is to conceal them.“ And he also said, “O divine art of subtlety and secrecy! Through you we learn to be invisible.” The word “invisible” has a high artistic meaning. Like the Chinese art of warfare, Carlvon Clausewitz, the founder of modern Western military theory, recognized that war is made up of very

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complex interactions and is a true chameleon. On War (1832) puts it this way: “The enemy is not a lifeless target, but an independent and living force… The enemy finds ways to resist our intentions and to force us to accept theirs.”11 This interplay between the enemy and us makes war tougher and complex. Military action does not provoke a single or simple response, so that the development of war is not determined by one side alone, but is necessarily the result of interaction. The war required what Napoléon Bonaparte described as “a spark of providence.”12 Clausewitz say, “No other human activity is so continuously or universally connected with chance. Thus, the element of chance prompted guesswork and luck play an important role in warfare.” He also notes that “of all human activities, war is the closest thing to a game of cards.”13 Clausewitz also offers a brilliant analogy: “War is not like a field of wheat that can be mowed with a sickle, regardless of the condition of the individual stalks, and the efficiency of the mowing depends only on the quality of the sickle. War is more like a forest made up of large trees, which must be cut down with the axe in accordance with the individual characteristics and development of each tree.”14 Some straightforward strategists throughout history have simply admitted that there are no rules to war and that strategy is essentially a matter of action. Among such strategists was the famous eighteenthcentury general Maurice de Saxe, a French marshal. Coincidentally, this is how he prefaced his great work, Reveries on the Art of War (1757): War is a science so obscure and imperfect that, in general, no rules of conduct can be given in it, which are reducible to absolute certainties; custom and prejudice, confirmed by ignorance, are its sole foundation and support.

11 Carl von Clausewitz. On War. Eds. & Trans. Michael Howard & Peter Paret. Princeton University Press. 1984. 77. 12 Andre Beaufre. An Introduction to Strategy. Taipei: Rye Field Publishing, 2000: 26. 13 Carl von Clausewitz. On War. Eds. & Trans. Michael Howard & Peter Paret.

Princeton University Press. 1984. 153. 14 Carl von Clausewitz. On War. Eds. & Trans. Michael Howard & Peter Paret. Princeton University Press. 1984. 153.

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All other sciences are established upon fixed principles and rules, while this alone remains destitute; and so far from meeting with anything fundamental among the celebrated captains, who have written upon this subject, we find their works not only altogether deficient in that respect, but, at the same time, so intricate and indigested.15

This, of course, is an overly “artistic” approach to war, ignoring that there is a scientific side to war. Mao Zedong defines strategy in the Problems of Strategy in China’s Revolutionary War: “The problem of strategy is about the overall regularity of war.” “Any war situation which acquires a comprehensive consideration of its various aspects and stages forms a war situation as a whole. The task of the science of strategy is to study those laws for directing a war that govern a war situation as a whole.” There are some basic principles of warfare, from which certain methods of application can be derived. Although they should often be modified according to different circumstances, they can, in general, guide the chief general of the army in tough and complex tasks in the chaos and turmoil of war. Therefore, the correct understanding of strategy should be that there are certainly laws and principles in the field of warfare, but the principles remain the same while its application is ever-changing, and the application of the principles is to be realized by genius. Yue Fei, a famous general of the China’s Southern Song Dynasty, said long ago, “The wonder of application lies in one’s mind.” Before Yue Fei led the army, the Song Dynasty’s conventional formation basically applied to infantry, i.e., set up a formation before going into battle; this inflexible approach made them repeatedly defeated in front of the cavalry of nomadic tribes such as the Qidan and the Nüzhen. The “Yue’s army” took the flexible warfare method of matching infantry and cavalry, and defeated the powerful cavalry of the Jin army. It is no coincidence that Frederick the Great of Prussia also changed the traditional horizontal formation of European armies and replaced it with a diagonal formation according to the needs of the war, which was actually a specific application of the universal principle of “concentrating troops in decisive places” in that era. Later countries have imitated this tactic, but the essence of the idea has always been lost, and as a result, it only turned into dogma. This is why the Prussian army, which clung to the oblique order in the Napoleonic Wars, was defeated in the Battle of Jena-Auerstedt. 15 Maurice Comte de Saxe. Reveries on the Art of War. Dover Publications. 2012. 17.

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Mao Zedong once said that the “wonder” of the ancients’ so-called “wonder of application” is flexibility, which is “a talent of a smart commander, based on the objective conditions, to examine the time and the situation (the situation here involves the enemy’s situation, our situation, terrain, etc.) and take a timely and appropriate method” (On Protracted War).

4

Looking Inward or Outward---A Strategic Choice for Companies in the Digital Age

Companies can develop their capabilities in depth from within to differentiate themselves in the marketplace. Or they can actively leverage the resources possessed by other companies to deliver greater value to consumers.

4.1

Pros and Cons of Each of the Two Strategies

Those who are concerned about corporate strategy cannot fail to notice that such structural resources that geographical barriers, policy constraints, and economies of scale that have traditionally given companies a strategic advantage are now melting away. Squeezing costs out of operations, which once worked, is becoming increasingly difficult to achieve significant results. In the search for new sources of advantage, two main schools of strategy have emerged: the core competency school of strategy and the leverage school of strategy. Gary Hamel and C. K. Prahalad’s Competing for the Future (1994) is a masterpiece of the core competency school of strategy. In this book, the authors state that companies should base their business strategies on their core competencies. The theory is that strategic advantage comes from clearly identifying and strengthening the core competencies within the company. A few years after the publication of the Competing for a Big Future, a second school of strategy, the leverage school of strategy, was born with Adam M. Brandenburger and Barry Nalebuf’s Co-opetition: A Revolution Mindset That Combines Competition and Cooperation (1996) and James F. Moore’s The Death of Competition: Leadership & Strategy in the Age of

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Business Ecosystems. Instead of considering strategic priorities exclusively from within the company, these two books emphasize leveraging more of the company’s external resources to strengthen its own capabilities. Each school of strategy has its own advocates, and their relative strengths and weaknesses have fluctuated with the ebb and flow of business. During the business boom of the late 1990s, the leverage school of strategy seemed to prevail, marked by the addition of a new executive position at many companies, vice president of organizational development (OD), who coordinated the management of relationships with strategic business partners. By the 2000s, as the economy began to decline, there was a trend toward a return to the roots of corporate strategy, with executives turning their attention to the internal aspects of the company, so that the core competency school of strategy became prevalent again. Business strategy thinkers John Hagel III and John Seely Brown argue that both schools of strategy have their strengths. Companies can develop their capabilities in depth from within to differentiate themselves in the marketplace. Or they can actively leverage the resources possessed by other companies to deliver greater value to consumers. Yet, each of these strategies cannot be complete in isolation. When faced with more demanding and controlling consumers, no company, no matter how great, can afford to rely solely on its own resources. Likewise, companies cannot just beg to use external resources and ignore the enhancement of their own strength.16 In The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization (2005), Hegel and Brown propose a new way to gain competitive advantage—by accelerating capability building. The term “capability” refers to the power of a company to use resources to create added value beyond cost, while “resources” broadly cover visible (financial, human, and physical) and invisible resources (intellectual property, networks, and brands). These resources may come from within a company or they may belong to other companies.

16 John Hagel III, John Seely Brown. Finding New Sources of Strategic Advantage. Harvard Business School Working Knowledge. https://hbswk.hbs.edu/archive/findingnew-sources-of-strategic-advantage. May. 2, 2005.

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4.2

Seize the Opportunity Through Both Internal and External Endeavors

At first glance, it seems that there is not much subtlety in the formulation of “capability,” but a closer look reveals that Hegel and Brown’s insights have their own profound implications. The capability deserves a more dynamic understanding. As competition intensifies, managers who think capabilities are static will learn what it is like to be quickly overtaken by competitors. The challenge is to build capabilities faster and translate them as quickly as possible into overall improvements in company performance. The connotation of innovation needs to be expanded. The fact that a company engages in capability building means that it should create greater value through innovation. However, most companies still struggle with efficiency, not innovation. The term “innovation” in this context has a much broader meaning than what company managers usually refer to as “innovation.” The latter refers mainly to product innovation, as the introduction of a new generation of products can strengthen a company’s market position. But product-related changes are really only part of the innovation challenge that companies face. Innovation must include an element of capability, and while it sometimes manifests itself only at the product or service level, it can sometimes be accompanied by innovation of entire processes or even business models. Be brave enough to cross corporate boundaries. Most companies do not put enough effort into understanding the changes that are happening at their boundaries and what those changes mean for their core business. Companies that are brave enough to cross boundaries will build their capabilities faster than companies that are obsessed with defending and growing their core business and core markets. Rethink the rationale for the existence of firms. Economist Ronald H. Coase argued that firms are a response to the high cost of using markets. Firms exist because they reduce transaction costs, such as search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs. According to this view, efficiency is the primary motivation for setting up a company. However, as information technology systematically reduces the cost of interaction within and outside the company, the fundamental reason for the existence of firms is changing. Perhaps we should reassess the rationale

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for the existence of firms, moving from an efficiency-based starting point to one based on capability building and systematic innovation. Arguably, Hegel and Brown’s “capability theory” has added more energy between both schools of strategy. While proprietary capabilities are still the basis of strategy, companies must continue to develop them through collaboration with others to ensure that the proprietary capabilities always create a strategic advantage for them. 4.3

Three Major Tasks of a Distinctive New Strategy

There are three strategic priorities for company managers to focus on when it comes to building capability. Dynamic specialization. “Dynamic specialization” means that companies must be willing to shed resources and businesses that do not help them differentiate, and instead develop capabilities that enable them to stand out in the marketplace. The trend toward conglomeration peaked in the early 1960s and 1970s, then ebbed and was replaced by a trend toward business divestiture, but this was only the first wave of specialization. Now, the offshoring (and related outsourcing) trend is driving companies to accelerate a new wave of business centralization initiatives. In this process, companies carve out some core parts of their business and delegate them to third parties. This approach feeds innovation momentum, opens innovation opportunities, and builds innovation capabilities. Connection and coordination. Process networks allow companies to organize their resources within a very long business process. Instead of the “push” model of preparing resources by anticipating demand, it is a “pull” model that allows flexible access to resources based on specific market needs. A process network represents a mechanism for acquiring specialized capabilities on a global scale. For this network to operate efficiently, it requires a common performance system. Leverage capability building. It refers to efficient capability building across enterprises. The real test is whether the company can create a relationship that facilitates capacity building for all participants. A company, no matter how excellent and efficient, should never work alone; only by leveraging the complementary specialized capabilities of other companies can it take its performance to the next level more efficiently.

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In short, a distinctive new strategy should effectively combine three major tasks: pay close attention to unique individual capabilities; effectively leverage other specialized capabilities of business partners; and actively promote inter-network and inter-business partner capability building.

5

Paradox as a Path Forward

Any ambitious company will face many paradoxes in its development, operation, and continuous transformation. It is only by skillfully balancing the conflicting demands can they find their way to the future.

In The Empty Raincoat: Making Sense of the Future (1994), Charles Handy depicts a memorable image that a bronze sculpture of a raincoat by Judith Shea stands upright with nothing inside. For Handy, this empty raincoat is a symbol of the paradox from which modern man cannot escape. The key to avoid making life an empty raincoat and to make the future meaningful lies in recognizing and getting out of the paradox. 5.1

Everything in Business Constitutes a Paradox

Management is increasingly becoming a complex behavior in a complex environment. Although there are numerous statements about management, people are becoming more confused by them: strategy is indispensable, but flexibility is equally important; companies should be globally oriented, but localization is also a must step; centralization is necessary for business development, so why not decentralization? Large companies yearn for the passion of small businesses, while small businesses covet the scale of large ones; companies expect less self-righteous employees in order to make them competent team players, while praying to find managers who are willing to share the responsibility… Most companies are just pushed around by various narratives. However, not sticking to a fixed “ideology” may constitute a good way for managers to understand the world they live in, because no management style is not a double-edged sword. So managers must learn to walk

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a tightrope between the two extremes, thus “paradox management” was born. What is a paradox? A paradox is a seemingly absurd or selfcontradictory statement or proposition that when investigated or explained may prove to be well founded or true. Paradoxes are ubiquitous in life, because there is no such thing as a “perfect” plan of action. And business is as full of paradoxes as life is. Just as Tom Peters says: “Everything in business constitutes a paradox. To be great, you have to be consistent. And when you’re consistent, you’re vulnerable to attack.”17 Paradox management deals with issues that seem contradictory on the surface, but may actually be both correct. Paradoxes make us uncomfortable, and they require us to be in the presence of two opposing forces and still maintain balance. But in fact, paradox is a powerful concept. According to Søren Kierkegaard, “One must not think slightingly of the paradoxical…for the paradox is the source of the thinker’s passion, and the thinker without a paradox is like a lover without feeling: a paltry mediocrity.”18 5.2

Paradoxes: Both Confusing and Inspiring Challenges

So what use is a mind game-like paradox to hands-on managers? One important fact about this is that paradoxes in business management are growing in number and variety. According to the PwC Change Integration Group, a few of the major paradoxes that confuse managers the most include19 : A stable foundation is necessary for positive change When leading change, those business leaders who are successful have a firm grasp on the key factors that contribute to stability, such as corporate culture, a sense of belonging, vision, mission, strategy, and core

17 Tom Peters. Tom Peters’s True Confessions (continued). Fast Company. https:// www.fastcompany.com/44173/tom-peterss-true-confessions-continued. Nov. 30, 2001. 18 Søren Kierkegaard. Philosophical Fragments. Qi Wang (trans.). Beijing: China Social Science Press. 2013. 3. 19 PwC Change Integration Group. The Management Paradox: Management Innovation in High-Performing Companies. Beijing: Economic Daily Press. 2002.

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competencies. These stabilizing factors act as beacons to guide employees through the winds and waves of change. A business is a whole made up of individual employees, its basic building blocks To create a global enterprise, you must recognize that the most basic unit that builds a business is the individual employee. You must recognize that each employee is a unique individual in terms of skills and aspirations, and an integral part of the organization. You must take care of the majority while not neglecting the individual. Transform the corporate culture in a manner both straightforward and circuitous Culture determines corporate decision-making patterns, guides organizational behavior, and regulates the individual behavior of all members. At the visible level, it is “the way we do things around here,” but at the deeper level, it encompasses beliefs, values, and attitudes about how people treat each other across the organization. The persistence and depth of influence of corporate culture ensure the continuity of organizational behavior, which is clearly an important asset for the organization. However, this cultural inertia also makes culture change almost no way to start. The influence of culture permeates all sorts of subtleties. Another place where organizational culture can be reflected is in the performance appraisal system and compensation system. To be circuitous means to use tools such as performance appraisal, compensation system, or employee’s daily behavioral norms to achieve the purpose of culture transformation. True decentralization requires strong leadership New leadership models are emerging in complex situations that meet the urgent need for bold leadership styles while balancing personal freedom and initiative. As one CEO said about the relationship with his subordinates, “I just teach them the way, and let them go as to exactly how to do it; but I also take the reins when intervention is needed.”

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First-line managers must also be strategic thinkers General Norman Schwarzkopf said, “Any war plan will fall apart in the face of the enemy.” His subtext was that it is better to let your commanders on the ground develop and implement “real-time” strategies and tactics, otherwise victory is impossible. For companies, strategic plans can no longer be devised in the “background” by headquarters and then forced out, but have to be developed by the front line. A multinational executive put it well: “I do not mean let the planners be hands-on; I mean only those who are hands-on are qualified to make plans.” Gone are the days of abundance when there were both planners and managers. To achieve good results, the two must become one. 5.3

Decline After Success

Among all the paradoxes, the most thought-provoking is a widely recognized phenomenon—the “decline after success,” which can also be called the “paradox of success.” Simply put, what and how you get to where you are today may rarely be what and how you continue to get to where you are tomorrow. In Search of Excellence (1982), by Tom Peters and Robert H. Waterman, is famous, but many of the companies in the book that received the title of “outstanding company” seemed to be cursed. In the decade following the book’s release, disaster struck these “star companies” one by one. This was particularly evident in the high-tech sector, where National Semiconductor, Wang Laboratories, Digital Equipment Corporation, and a host of other companies rated as high performers fell by the wayside. Such phenomena indicate the fragility of reputation and success. What is the reason for the “decline after success”? How did yesterday’s winning formula evolve into today’s inertia and rigid dogma? How does the growing self-satisfaction, even arrogance, within successful companies cause them to lose the ability to face reality? Few people can answer these questions. It is only when increasingly rigid policies and the accumulated ego of management pull the company into the depths of crisis that managers are forced to sit together and reflect, “What went wrong?”. Was such a tragedy inevitable? According to Professor Paul Evans of INSEAD, the reason lies in a powerful inertia in companies, where managers continue to refine the practices they rely on for success until

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they go to dangerous extremes.20 Leadership consultant John O’Neil attributes the “paradox of success” to the inability of the achievers to forget the past. If one has too many emotional ties to the past, it is difficult to be different from the past in any way and to hold on to the past for too long.21 5.4

Getting Out of the Either/Or Box

Living with paradoxes is neither comfortable nor easy. What managers must recognize is that while they can and should resolve certain paradoxes, it is absolutely impossible to completely eliminate, resolve, or avoid them. Chaos, complexity, and contradiction—these are the new reality that today’s businesses face. There were times when there was an unwavering belief that the right way to manage their organizations and their lives should exist. However, both complexity science and chaos theory tell us that turbulence is a necessary prelude to creativity and some kind of new order. Any ambitious company will face many paradoxes in its development, operation, and continuous transformation, and it is only by skillfully balancing the conflicting demands or so-called tensions created by the paradoxes that managers can achieve good performance. This phenomenon has been noted by more than one scholar. The patriarch of paradoxical management is British business economist Charles Handy, who, in The Empty Raincoat, calls on managers to learn to live with opposites: “To survive better in every way, we must learn to make use of paradoxes, to balance contradictions and inconsistencies, and to take them as a ticket to finding a better path.”22

20 Paul Evans. The Dualistic Leader: Thriving on Paradox. In Srabanti Chowdhury (ed.) Management 21c: someday we’ll all manage this way. London: Prentice Hal-Financial Times. 2000. 66–82. 21 John R. O’Neil. The Paradox of Success: When Winning at Work Means Losing at Life. TarcherPerigee. 1994. 22 When The Empty Raincoat by Handy was published in the United States, the name was changed to The Age of Paradox. Charles B. Handy. The Age of Paradox. Harvard Business Press. 1995.

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According to Gary Hamel, “Organizational success in the years ahead will depend on the ability of employees at all levels to manage seemingly irreconcilable trade-offs—between short-term revenue and longterm growth, competition and collaboration, structure and emergence, discipline and freedom, and individual performance and team success.”23 What do these trade-offs have in common? They are polarized opposites (polarities). A condition, behavior, or person is said to have polarities if it has seemingly contradictory qualities, and both poles of the contradiction are correct and both constitute necessary conditions for long-term success. Effectively managing polarity requires first-class leadership to distinguish between either/or problems to be solved and both/and trade-offs to be managed permanently. If we want to succeed in the long run, we must take a both/and approach to dismantling polarized oppositions. As Jim Colins and Jerry I. Porras put it, a key success factor for forwardlooking companies is that they do not frame themselves in the “Tyranny of the OR,” but rather get out of a rut with the “Genius of the AND”; the key to success is to embrace poles.24 For advocates of paradoxical management, paradoxical management is not about being fence-sitters without clear answers, but about creating a mental point of reference while acknowledging that business is full of paradoxes. Because the more sensitive a manager is to the complexity of the situation, the more likely the right path to success will emerge at the right time. Rather than providing a stable approach to conflict resolution, carefully choosing or compromising between conflicting “either/or” goals, paradox management can give rise to a new paradigm that maintains a dynamic balance in the organization. In other words, the challenge for leaders is to recognize that different alternatives must be addressed and to understand that the world we live in does not reward consistency, at least not in the long run. It can thus be said that managing dynamic balance is at the heart of the paradoxical management technique. “Too many things seem to contain their own contradictions, too many good intentions get unexpected results, and too many successful rules 23 Gary Hamel. Moon Shots for Management. Harvard Business Review. https://hbr. org/2009/02/moon-shots-for-management. 24 James C. Collins, Jerry I. Porras. Built to Last: Successful Habits of Visionary Companies. Harper Business. 1994. 43.

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carry thorns in their tails,” Handy writes.25 In an age when paradoxes are as fluid as the weather, does not management mean wobbling along under the weight of opposing forces?

6

Dynamic Capabilities Determine the Speed

The fast or slow development speed of a company is not something that can be forced, but depends on the strength of its own competitiveness.

Fast development is a trend. “If the 1980s were the era of quality and the 1990s reinvention, the first decade of the twenty-first century is the era of speed, the era of rapid transformation of business itself.” This is a quote from Bill Gates in the preface of his book Business @ the Speed of Thought: Using a Digital Nervous System.26 In terms of the course of industrial development in society as a whole, a clear trend is that the average development speed of businesses in the industrial era is faster than that in the agricultural era, and even faster in the information age. Businesses with slow development speed will certainly fail to gain a foothold in the era of ten times speed, but blindly pursuing high speed will lead to many problems, which requires businesses to grasp the balance between fast and slow. Such grasp is about the management of speed. All companies in the new economy have witnessed the emergence of the new topic of speed management. McKinsey has done a special research in the development speed of companies in the new economy. The 80 sample companies include B2B companies, B2C companies, and infrastructure providers. The results of the research showed that speed is only one of the many factors that influence business development, and that simply pursuing speed will rarely pay off satisfactorily. Of the 80 companies, 10 percent relied on the benefits of fast growth under certain conditions; and of the other 90 percent, 80 percent did not lend themselves to fast growth. The results of such a research must be unexpected to many people, because we seem to have long been accustomed to the saying “it is not the big fish which eats the small fish, it is the fast fish which eats the slow 25 Charles B. Handy. The Age of Paradox. Harvard Business Press. 1995. x. 26 Bill Gates. Business @ the Speed of Thought: Using a Digital Nervous System. Xiangui

Jiang, Ming Jiang (trans.). Beijing: Peking University Press. 1999.

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fish.” In fact, for companies in the new economy, speed can indeed bring great competitive advantage. However, McKinsey’s research shows that only companies that balance speed and stability are truly healthy. It refers to companies that combine speed and stability as agile companies. No one believes that sluggish companies thrive. Likewise, companies that achieve success through sudden speed but fail to stabilize the foundation underfoot (including processes and structures) will quickly lose in the upward momentum. However, some executives believe that speed and stability are two forces moving in opposite directions, and also hypothesize that there may be a negative correlation between them. McKinsey’s research confirms that the opposite is true: agile companies can move fast while balancing it with organizational transparency, stability, and structure. Companies that do so not only maintain their performance, but also promote learning and innovation, getting more motivated from top to bottom.27 Business development is limited by time constraints. The art of management is to know and choose when to go fast and when to go slow. Companies that benefit from speed are mostly characterized by being first movers in large markets, by being able to build barriers to keep out competitors, and by having direct control over the key business elements that launch the company. Specifically, speed is only effective under the following conditions. The company is able to establish barriers to entry. If rivals can enter the market through rapid replication, it would be unwise to spend a lot to rush into the market quickly. A rush only makes sense if you can lock in customers and keep your rivals out. The company has a strong market potential. It is not enough to build barriers; it only makes sense to venture forward quickly when the market potential is large enough (billions of dollars or more), and a large market means getting more in return than what was expended on entry. The company has the ability to manipulate several risk factors. Do not focus too much on speed if the business relies on factors that are beyond your control, such as technological uncertainty, frequently changing standards, a large number of existing competitors, core

27 Michael Bazigos, Aaron De Smet, Chris Gagnon. Why Agility Pays. McKinsey Quarterly. https://www.mckinsey.com/business-functions/organization/our-insights/why-agi lity-pays. Dec. 2015.

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resources in the hands of others, and so on. A troublesome partner is also an obstacle. However, it is not easy to meet all the three conditions at the same time. If a company is facing a new and complex market with uncertainties beyond its control, it should act cautiously and should not venture into the market. In the industry where the technical standards are uncertain, a company should not promote too fast development speed, unless it is sure to become the new industry standard setter; otherwise, once the technical standards have changed, the company has to invest very high conversion costs to adapt, thus falling into a dilemma. If the products or services provided by the company can be quickly copied by competitors, then the pursuit of rapid development is not wise, because it often leads to a high turnover of employees, customers are also difficult to lock, the brand building cycle is greatly lengthened, and a large number of competitors may appear at any time. In addition, when a company wants to enter a market with limited capacity, there is no need to pursue speed, because the pursuit of speed is bound to be costly, while the market feedback to the enterprise is limited, the development of the enterprise will not be sustainable. Studies show that rapid development is only worthwhile when the capacity of a market reaches several billion dollars or more. If we take a closer look at the development process of high-tech industries, we will find that although the corporate world is pervaded by a strong atmosphere of seeking fast speed, the ultimate winners of fierce competition are often those companies that are good at grasping the rhythm, fast and slow, in a measured manner. Microsoft is a typical example. Perhaps Microsoft is the representative of speed winning in everyone’s eyes, but it is not. Instead of saying that Microsoft’s success is attributed to “fast,” it is better to say that it is due to “slow.” Throughout Microsoft’s history, despite its impressive track record, none of the product technologies or services on which it relies for its success are truly its own. In other words, Microsoft is not necessarily faster than other companies in terms of innovation. However, Microsoft’s strength lies in the fact that once it aims in a certain direction, it is always able to build up momentum and catch up at a very fast pace to take the lead. The speed of company development should be fast or slow, depending on the specific situation, not to stick to one end. In fact, fast and slow is not the most important issue; the most important issue is whether the company has its own core competencies. Fast or slow strategy choice in

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the end is based on the situation of the company’s core competencies. The development of core competencies is a process that every company cannot skip. Even if a company that has not formed its own core competence enjoys prosperity, this prosperity must not last.

7

Swimming Across Under the Winds of Change We should expose ourselves to the winds of change.

Andrew (Andy) Grove wrote about his time in Hungary before he was 20 years old at the age of 65 in a memoir called Swimming Across: A Memoir (2001). The book tells that a physics teacher, Mr. Walensky, gave Grove a comment at a parent-teacher conference when he was a college prep student: “Life is like a big lake. All the boys enter the water from one end and start swimming. Not all of them are able to swim across. But I believe that Grove is one of them who will definitely swim across.”28 Mr. Walensky hit the nail on the head. Grove died on March 21, 2016. An obituary reads, “Andy Grove, who survived Nazi occupation, Soviet oppression, battled prostate cancer and built the world’s largest chip manufacturing company, died at 79.”29 Born in 1936 in Budapest, Hungary, to a middle-class Jewish family, Grove’s carefree childhood was soon shattered by dramatic upheaval. At age 8, Nazi Germany invaded his hometown and sent nearly half a million Jews to concentration camps, including the infamous Auschwitz. Rudolf Höss, the camp’s commander, admitted at his postwar trial that he had murdered 400,000 Hungarian Jews within three months. To escape from bad luck, Grove and his mother went into hiding, while his father was put to hard labor in a camp, and the family was not reunited until after the war. At the age of 20, during the Hungarian Revolution of 1956, Grove left his home and crossed the Austrian border in the middle of a night. In 1957, Grove finally moved to the United States, not only penniless, but 28 Andy Grove. Book Excerpts: Escape from Budapest. Fortune. https://fortune.com/ 2001/11/26/book-excerpt-escape-from-budapest/. Nov. 26, 2011. 29 Ina Fried. Legendary Intel CEO Andy Grove Leaves a Legacy of Tenacity. Vox. https://www.vox.com/2016/3/21/11587168/legendary-intel-ceo-andy-grove-lea ves-a-leg-acy-of-tenacity. Mar. 21, 2016.

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also unable to speak a word of English. In his memoir, he summed up his first 20 years this way: I had already lived through the fascist dictatorship in Hungary, the German occupation, the Nazi “final solution” for the Jews, the siege of Budapest by the Soviet Red Army, the chaotic democracy just after World War II, the repressive rule of the Hungarian communist system and a suppressed popular uprising... Many young people died and countless others were imprisoned. Only about 200,000 Hungarians fled to the West, and I was one of them.30

After that, Grove never returned to Hungary. “What roots I had in Hungary,” he says, “were cut off when I left and have withered and died ever since.”31 The young Budapest native’s life began anew in America. He taught himself English, paid his way through school by working as a waiter. After earning a bachelor’s degree in chemical engineering from the City University of New York and a doctorate from the University of California, Berkeley, he began his career at Fairchild Semiconductor Laboratory in California until he followed Robert Noyce and Gordon Moore in founding Intel Corporation, becoming the company’s first employee. At Intel Corporation, he went on to demonstrate his amazing managerial talent. It is fair to say that it was Fairchild Semiconductor Laboratory and Intel that gave the Santa Clara Valley in the southern San Francisco Bay Area its name “Silicon Valley,” ushering in the era of silicon-based chips. Originally called the “Fruit Grove,” the area became a global mecca for high-tech innovation and venture capital through the efforts of Grove and his contemporaries. Marc Andreessen said, “If you had to name one person who created Silicon Valley, it would be Andy,” and “Andy set the model for all the

30 Andrew S. Grove. Swimming Across: A Memoir. Hachette Book Group, 2001: Prologue. 31 Kati Marton. The Great Escape: Nine Jews Who Fled Hitler and Changed the World. Simon & Schuster. 2006. 224.

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leading Silicon Valley companies that followed.”32 Given his dual role as entrepreneur and investor, Andreessen’s words are compelling. In 1979, Grove was named President of Intel Corporation. In 1987, he was named CEO. In 1997, he began his tenure as Chairman of the Board and CEO. In May 1998, he resigned from his position as CEO. Thereafter, he served as chairman of the board of directors of Intel Corporation until May 2005 and remained as a senior advisor to the company after that. To this day, people still remember Grove for many achievements: foreseeing the vision of central processing units overtaking memory chips, thus seizing the opportunity to grow into a semiconductor giant; launching the “Intel Inside” marketing campaign, making Intel the dominant brand in the industry chain and a household name among consumers; aligning with Microsoft to make the “Wintel” duopoly dominate the personal computer era, making personal computer users all over the world become Intel’s followers. But perhaps the most important lesson Grove left Intel and the whole world is: no matter how good the success, failure is only a moment away. Grove has compiled the best of his management into a book, Only the Paranoid Survive: How to Achieve a Success That’s Just a Disaster Away (1998). In this book, he coined the famous term “strategic inflection point.” Grove says: “If you don’t navigate your way through an inflection point, you go through a peak and after the peak the business declines. It is around such inflection points that managers puzzle and observe, ‘Things are different. Something has changed.’ Put another way, a strategic inflection point is when the balance of forces shifts from the old structure, from the old ways of doing business and the old ways of competing, to the new. Before the strategic inflection point, the industry simply was more like the old. After it, it is more like the new. It is a point where the curve has subtly but profoundly changed, never to change back again.”33

32 KIM E. Mark Zuckerberg and Marc Andreessen pay tribute to a Silicon Valley legend in this heartwarming video. Business Insider. https://www.businessinsider.com/ andy-grove-tribute-video-201510. Oct. 9, 2015. 33 Andrew S. Grove. Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company. Currency. 1999. 33.

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The “strategic inflection point” sums up the secret of Intel’s success: clearly identifying the major trends in the industry and taking advantage of them before others. “At the strategic inflection point, the old strategic map is replaced by a new one, enabling the company to rise to new heights.” In particular, Grove points out that the word “point” is misused for the concept of strategic inflection point. “It is not a point, but a long, hard struggle.”34 “Only the paranoid survive,” Grove’s quote has become a very famous motto in management circles. “As managers, we abhor changes, especially when those changes involve us in them,”35 Grove frankly admits. For this reason, he never forgets to remind himself: Intel could face extinction with only one wrong answer to a question. A closed mind then is the active door to the abyss. It was precisely because of his constant concern that Grove came to the following conclusion: Whenever it comes to business management, I believe in paranoia. Businesses breed the seeds of their own destruction in the midst of prosperity. The more successful you are, the more people drool over you, stealing your business piece by piece until you end up with nothing left. I believe that the most important duty of a manager is to be constantly on the lookout for attacks from others and to spread that awareness to his subordinates.36

The sense of “paranoia” helped Grove become one of the greatest managers in American business history. Writing Andy Grove: The Life and Times of an American Business Icomn (2006), Richard S. Tedlow made a discovery: America has an unparalleled ability to build business giants, just as Italy produces opera and the Russians excel at fiction.37 Today, we remember Grove not only for his magic in creating new products, but also for his ability to build a great organization—forging

34 Andrew S. Grove. Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company. Currency. 1999. 95. 35 Andrew S. Grove. Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company. Currency. 1999. 123. 36 Andrew S. Grove. Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company. Currency. Currency. 1999. 3. 37 The Man Who Put Intel Inside. The Economist. https://www.economist.com/bus iness/2016/03/26/the-man-who-put-intel-inside. Mar. 26, 2016.

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Intel from a startup to the global semiconductor power it is today. For this, Grove ranks among America’s most brilliant organization builders, alongside with Andrew Carnegie and John D. Rockefeller. Personally, an ordinary young man living in twentieth-century Europe—the worst place in the worst time—was able to realize his dream in another country with his bare hands for no other reason than, as Grove himself said, “We should expose ourselves to the winds of change.”38 What is the importance of embracing the winds of change? The following quote is worth remembering for all those in business: “We should expose ourselves to our customers, both those who are with us and those we may lose as we cling to the past. We should open the door to lower-level employees who, if we encourage, will inform much of what we need to know. We must even invite those who constantly evaluate us and criticize us (e.g., journalists and financial people) to weigh in. Set the table and consult them about competitors, industry trends, and what they think we should focus on most. When we commit to pure action, our perceptions and intuition will quickly be honed.”39

8

The Crazy Steve Jobs

Steve Jobs may be “the greatest business leader of our time,” but the Bside of this glorious image presents a volatile, demanding, and arbitrary man.

In 1997, Apple, the company Steve Jobs had founded, was on the brink of collapse. By that time, Jobs had been away from the company for 12 years. The founder, who had been mercilessly expelled by the board of directors, had sold his stock down to one share on his departure—and Apple’s good fortune seemed to have been thrown off with it. However, in 1997, Apple bought NeXT, a new company founded by Jobs, giving him a chance to make a comeback. This time, Jobs debuted with a famous commercial advertisement themed as “Think Different.” In many ways, this new commercial marked 38 Andrew S. Grove. Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company. Currency. Currency. 1999. 22. 39 Andrew S. Grove. Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company. Currency. 1999. 22–23.

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the beginning of Apple’s re-rise as a technology giant. In the years prior to the ad, Apple had watched its most loyal users betrayed in droves; and, with the failure of the Newton project, Apple had lost significant investment and was demoralized. With the Think Different-themed ad, Steve Jobs brought Apple back to its earlier “counterculture” image and announced to the world that the innovative Apple had the ambition to change the world. Titled “Crazy Ones,” the one-minute black-and-white film features 17 icons of the twentieth century, Albert Einstein, Bob Dylan, Martin Luther King, Richard Brandson, John Lennon (with Yoko Ono Lennon), Buckminster Fuller, Thomas Edison, Muhammad Ali, Ted Turner, Maria Callas, Mahatma Gandhi, Amelia Earhart, Alfred Hitchcock, Martha Graham, Jim Henson (with his Kermit the Frog), Frank Lloyd Wright, and Pablo Picasso. The commercial ends with a little girl opening her closed eyes as if she were making a wish. The narration of the commercial is like a tribute to people who are crazy enough to change the world and deserves to be transcribed in full here: Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They are not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you cannot do is ignore them. Because they change things. They push the human race forward. And while some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.40

Steve Jobs’ new ad seemed to carry some kind of magic that has driven Apple from one glory to another ever since. First came the hugely successful iMac personal computer and then the Mac OS X operating system. The next stories are familiar: iPod reinvented the personal music player; iTunes shook up the entire record industry; iPhone drove an unprecedented revolution in smartphones; iPad created a whole new category of technology products. Apple’s powerful ability to innovate

40 Here’s to the Crazy Ones Advertisement. Internet Archive. https://archive.org/det ails/Apple_Steve_Jobs_The_Crazy_Ones_NEVER_BEFORE_AIRED_1997_riginal_Post. 1997.

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technology and create models forced all technology companies to crawl after it. In retrospect, Jobs’ 1997 statement was extremely simple, yet very prescient: “Apple’s not as relevant as it used to be everywhere, but in some incredibly important market segments it is extraordinarily relevant.”41 Even in a place like Silicon Valley, which is full of superstars of technology, Steve Jobs’ star shines brightest. What was his greatness? In a nutshell: he launched the personal computer (in this case, I mean the personal computer in the broad sense, not the IBM personal computer) and turned it on its head. Back in the 1990s, Silicon Valley had little to do with mobile technology. Today, however, Silicon Valley becomes the epicenter of the mobile revolution, all because Apple developed iPhone. iPhone, along with iPad, ended the era of the personal computer. When Steve Jobs died in 2011, people wondered what would happen to Apple without Jobs. And what would happen to Silicon Valley? Tim Bajarin, a seasoned technology analyst, says that thanks to iPhone and Android, Silicon Valley is once again a mecca for leading technology trends. “I started studying Silicon Valley 30 years ago; now, I am more confident than I was then. I think the next 10 years are going to be the most exciting times in Silicon Valley.”42 So rather than ending an era, Steve Jobs started one; rather than building the world’s most innovative and valuable technology company, he reinvented Silicon Valley in his own image; rather than inventing a series of cool consumer electronics, he changed the way people relate to technology and led the way to a global digital culture. There is no doubt that Jobs’ business successes were legendary long before his death in October 2011. But, most business leaders would be excited about achieving the market success that Steve Jobs has achieved, but would they aspire to lead as he did? Before answering this question, we should delve into the management style of Steve Jobs. Dynamic and 41 Connie Guglielmo. A Steve Jobs Moment That Mattered: Macworld, August 1997. Forbes. https://www.forbes.com/sites/connieguglielmo/2012/10/07/a-steve-jobs-mom ent-that-mattered-macworld-august-1997/#ca788123edd5. Oct. 7, 2012. 42 O"Brien: Steve Jobs reshaped Silicon Valley in his own image. The Mercury News. https://www.mercurynews.com/2011/08/24/obrien-steve-jobs-reshaped-siliconvalley-in-his-own-image/. Aug. 24, 2011.

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controversial as a leader, Jobs’ leadership success depended heavily on his flair for innovation. Reading the Steve Jobs (2011) by Walter Isaacson, it is certainly not difficult to find a traditional portrait of a leader: the leader is the great man, who determines the course of the world with extraordinary determination and absolute power. Jobs had great dreams (“people with passion can change the world for better”) and bold actions that made them come true, creating products and services that changed the way many people live and shaking up a number of industries, including computers, cell phones, journalism, publishing, movies, music, retail, and applications. At the same time, however, Jobs’ leadership style took on a complex orientation. When he was engaged, he was focused, confident enough to take risks, and his extraordinary charisma attracts untold numbers of employees and customers to relentlessly pursue his aspirations. But all this is based on a very immature interpersonal approach: he is paranoid, impatient, overly critical, and sometimes even cruel. As Isaacson put it, Steve Jobs may be “the greatest business leader of our time,” but the Bside of this glorious image presents a volatile, demanding, and arbitrary man. While the term “servant leader” has been popular in the corporate world since the 1990s, with leaders portrayed as “dedicated, caring organizational mentors,” Jobs stands at the opposite end of the spectrum. However, Jobs’ seemingly destructive behavior was able to inspire top performance while undermining it, depending on where and how he initiated such behavior. His paradoxical leadership style seeded a strong corporate culture with a distinctive Jobs’ imprint, whether at Apple (which surprisingly played out twice), NeXT, or Pixar. Jobs intuitively realized that culture had to work in order to sustain the strategic capabilities embedded in his vision of perpetual creation. On that basis alone, he was far better than most business leaders. As he put it, “My passion has been to build an enduring company where people were motivated to make great products. Everything else was secondary. Sure, it was great to make a profit, because that was what allowed you to make great products. … which is the hardest work in business. That is how you really make a contribution and add to the legacy of those who went before. You build a company that will still stand for something a generation or two from now.”43

43 Walter Isaacson. Steve Jobs. Simon & Shuster, 2011. 569.

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In The Steve Jobs Way, Jon Katzenbach says that Steve Jobs’ flexible leadership style was both fascinating and confusing.44 For example, Jobs’ commitment was inconsistent; he liked someone easily and hated them very suddenly, both personally and professionally. In the relentless pursuit of top talent, a highly skilled organization was forged. But he also missed out on the potential contributions of many top-notch employees. Yet, surprisingly, many of those abandoned by Jobs along the way still harbor a certain reluctant respect for his positive qualities, and some will even come back to endure more of his torment again. When it comes to teamwork, Jobs developed an efficient, but dark indeed, modus operandi. Starting with the early product development teams led by Apple co-founder Steve Wozniak, Jobs consistently put strong pressure on his teams to go beyond what was possible. Some strong ones survived the challenges and became superb performers who were motivated by the pride of overcoming the impossible. Many others, however, fall into a state of unnecessary frustration. Leaders pay the price for this behavior by losing people who need more encouragement in the process. This approach also undermines the emotional engagement of sub-optimal talent, who make up the vast majority of teams in most companies. However, Jobs’ habit of distorting reality to suit his own purposes, coupled with the impatience, hectoring, and callousness that often accompany it, brewed a curiously mixed picture of the company he led. On the one hand, people in the business bought into the vision of the future Jobs painted, as evidenced by the strong culture he cultivated: even after his 10-year exile from Apple, the underlying essence of the culture he built somehow remained alive. On the other hand, Jobs’ reality distortion field can be extremely alienating and undermines his credibility, especially when he dismisses promising ideas or efforts as “nonsense.” If other leaders emulate these traits (for better or worse), will they get Jobs-like results? The short answer is: no. If applied to the wrong strategy, market, or product, such actions could bankrupt a company. Ultimately, what made Steve Jobs a successful leader was his acclaimed talent for envisioning and delivering breakthrough products and services. He leads in an unprecedented way to innovate for his users, a personal style that cannot be emulated by the average leader. 44 Jon Katzenbach. The Steve Jobs Way. Strategy + Business, Summer 2012/Issue 67. https://www.strategy-business.com/article/00109?gko=2788e. May. 29, 2019.

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Few senior leaders pay as much attention to the details of product and design as Steve Jobs. He always considered simplicity, functionality, and consumer appeal before cost effectiveness, sales volume, or even profit. This attention was an integral part of the strategy and marketing capabilities of the company he led. He famously said, “A lot of times, people do not know what they want until you show it to them.”45 Indeed, he had an extraordinary (and certainly not infallible) ability to develop products that consumers wanted to buy, and no shortage of self-belief, courage, and drive to give life to those products. In this respect, Jobs’ genius was a certain imaginative leap that was instinctive, unexpected, and sometimes magical, born of his ability to integrate various disciplines, especially the humanities and sciences, in an artfully integrated project. Although Jobs was never willing to admit his shortcomings, Isaacson quotes words from a joint interview Jobs gave with Bill Gates in May 2007 in which Jobs revealed a reluctant awareness of his major flaws. “Because Woz and I started the company based on doing the whole banana, we weren’t so good at partnering with people,” he said of Apple’s design philosophy. “And I think if Apple could have had a little more of that in its DNA, it would have served it extremely well.”46 Who knows? If Jobs had had more time, he might have been able to make up for that shortcoming.

9

The 10-Year Test for Business Leaders

The merit of a CEO is measured by how the company will evolve 10 years after he leaves.

9.1

Cult of the CEO

In CEOs’ best moments, they are held up as shining stars, and the business is nothing more than a projection of their personality. The financial press trumpeted not Citigroup’s management excellence but Sanford

45 The 13 Most Memorable Quotes from Steve Jobs. Business Insider. https://www. businessinsider.com/steve-jobs-quotes-201310. Oct. 5, 2013. 46 Walter Isaacson. Steve Jobs. Simon & Shuster, 2011. 464.

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I. Weil’s magical leadership; portrayed not Oracle’s top-notch database technology but Larry Ellison’s headlines and stunts. A survey by Burson-Marsteller shows that investors are more willing to buy the stock of a company with a star CEO at a premium. Not to be outdone, the field of management has turned the analysis of leadership into a prominent science. Business schools are full of courses on leadership style selection, leadership awareness, and how to gain leadership charisma. Even “leadership coaching” has become a hot new profession. In 2001, Bruce A. Pasternack, Thomas D. Wiliams, and Paul F. Anderson, writing in Strategy + Business, described this tendency to focus on personal charisma, or even to equate the so-called charisma of a leader with the performance of the company, as “Cult of the CEO.”47 The “Cult of the CEO” features personalizing rather than institutionalizing the leadership of the company and attributing the company’s success to the CEO’s personal characteristics and wizardry. Pasternack et al. point out that while many strong leaders drive organizations to achieve, there is ample evidence that individualized leadership is unstable in the long run. Politically, we can look at the example of the Soviet Union under Nikita Khrushchev: although he was the driving force behind the launch of the first artificial Earth satellite in history, the final outcome of the Soviet-American showdown was the complete defeat of the Soviet Union. There are numerous precedents in corporate history: General Motors without Alfred P. Sloan, Polaroid without Edwin H. Land, and Coca-Cola without Roberto Goizueta, all of which have experienced varying degrees of decline. Personalized leadership ultimately does not lead to efficiency, and not only that, it can also generate great risks. The reason is simple: no one— not even a genius—can always be right; especially in a large organization, no one can have all the relevant and important information to make major decisions. If personalized leadership continues for too long, it must lead to the following consequences: resources are misallocated, opportunities are missed, and innovation is stifled. Excessive control stifles creativity and bureaucracy hinders organizational development. Criticisms such as Pasternak’s of “Cult of the CEO” were the first to question the charismatic leader. In the same year, Jim Collins published 47 Bruce A. Pasternack, Thomas D. Williams, Paul F. Anderson. Beyond the Cult of the CEO: Building Institutional Leadership. Strategy + Business. First Quarter 2001/Issue 22. https://doi.org/www.strategy_business.com/article/10841?gko=dc73e. Jan. 1, 2001.

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Good to Great: Why Some Companies Make the Leap… and Others Don’t (2001), advocating the concept of the “level-5 leader,” which suggests that there is a group of leaders who are both determined and humble enough to set aside their ego and commit themselves to the ambitious goal of building a superior company. The level-5 leaders shun compliments from their teams and never brag about themselves. They act calmly and coolly, relying primarily on high standards rather than personal charisma to motivate employees. In fact, Collins’ (co-authored with Jerry I. Porras) earlier and more acclaimed book, Built to Last: Successful Habits of Visionary Companies (1994), has developed the judgment that visionary companies do not need charismatic leaders who are far-sighted. On the contrary, such leaders may be detrimental to the long-term growth of the company. The best CEOs in the history of visionary companies did not have the personality traits of perfect, high-profile, charismatic leaders. Like the founding fathers of the United States at the time of the Constitutional Convention, they were preoccupied with constructing a great and lasting system, not setting out to be great leaders. They aimed at clock building, not time telling. Lee Iacocca passed away on July 2, 2019, at the age of 94. Perhaps the most incendiary of all myths about great business leaders is his experience. Many people still believe that Iacocca was a true entrepreneur who, as a single person, twice shaped the fortunes of two major American automobile companies. However, behind Iacocca’s star power were his serious mistakes as a company decision maker: delaying spending on new model designs, resulting in obsolete and low-quality products; spending limited financial resources on stock buybacks in exchange for a shortage of funds; getting involved in commercial jet production and financial services, making the business over-fragmented… Ten years after the publication of Iacocca’s acclaimed autobiography,48 veteran Detroit journalist and columnist Doron P. Levin pointed out in his Behind the Wheel at Chrysler: The Iacocca Legacy (1995) that the bad decisions of this domineering, egotistical manager have almost brought Chrysler back to its knees. The book attributes Iacocca’s failure to his inflated desires: his obsession with power, money and prestige, his luxurious lifestyle at public expense, his excessive enthusiasm for stock buybacks related to his

48 Lee Iacocca, William Novak. Iacocca: An Autobiography. Bantam Books, 1984.

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own personal interests, and even his alleged involvement in schemes to extract money from the company. 9.2

Corporate Parabola

Peter Senge, author of The Fifth Discipline: The Art and Practice of the Learning Organization (1990), pointed out that many companies grow at the expense of predatory use of strategic resources, and in the long run, the trajectory of such companies is parabolic. Thus, the merit of a CEO is measured by how the company will evolve 10 years after he leaves. And as we have seen, 10 years after Iacocca left Chrysler, the company struggled and was finally acquired by Daimler. 10 years is a brutal time period. It is by no means uncommon for great companies to go from simple to bloated and from focused to underfocused as time passes. Even the darling of Wall Street, Apple, has had its share of chaotic times; it was on the edge of a cliff in 1997 until it brought back Steve Jobs to change its fortunes. Apple co-founder Wozniak had an accurate comment about Jobs: “He wasn’t a day ahead of everybody, but 10 years.“49 However, even a wise and gifted man like Steve Jobs cannot escape the “10-year test of a business leader”: one view is that Jobs has built an executive “bench” that will ensure Apple’s continued success, while the other believes that after years of innovation, Apple is too deeply engraved with Jobs’ brand and is destined to go downhill in the “post-Jobs era.” 9.3

Steve Jobs’ Legacy

Just as some talk about Iacocca’s legacy, Jobs’ legacy is being gauged a few years after his death. Writing in Forbes, technology analyst Tim Bajarin points out that Jobs, though dead, still drives Apple’s current and future products.50

49 John Boudreau. 2011: Steve Jobs Resigns as Apple CEO, Stunning Tech World. The Mercury News. https://www.mercurynews.com/2011/08/24/2011_steve_jobs_res igns_as_apple_ceo_stunning_tech_world/. Aug. 24, 2011. 50 Tim Bajarin. Steve Jobs’ Legacy Still Drives Apple’s Current and Future Products. Forbes. https://www.forbes.com/sites/timbajarin/2019/10/07/steve_jobs_legacy_ stil_drives_apples_current_and_future_products/#6fb735433f19. Oct. 7, 2019.

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The key to this is that Steve Jobs created a company on his own terms and built into the executive ranks a deep understanding of the business and technology philosophies that still guide Apple’s entrenched leadership today. A major tenet of Jobs’ legacy is how to create a culture of innovation in a company. Jobs possessed an uncanny sense of what technology consumers might want, and drove Apple’s innovation in that direction. Jobs believed that technology for technology’s sake was worthless unless it was developed out of elegant form, function, and ease of use. That is why he brought new designs and ideas to the personal computer with Mac that IBM had not, and why, when he launched iPhone in January 2007, he called it an unprecedented “trinity”: a widescreen touchscreen iPod, a revolutionary phone, and a breakthrough Internet communication device. It all came from Jobs’ belief that the computing experience should be intuitive and easy to use. This was reflected in his early decision to follow the user interface design created by Xerox PARC and to make the GUI widely available with Mac. He also “borrowed” ideas from Xerox PARC and introduced the mouse, making it extremely easy for users to use the GUI. It is clear that innovation and ease of use guide everything Apple does in terms of hardware, software, and even services. It is part of the DNA that Steve Jobs passed down and is the main reason for Apple’s continued success to this day. However, long after Steve Jobs’ death, Apple continues to thrive thanks to the company’s dedicated management program. When Apple hires executives, candidates are required to follow this program, which is designed to instill in them the “Apple Way” of thinking and doing things. This is akin to graduating from Apple University, having mastered Apple’s vision, leadership, management goals and style, and firmly following the “Apple Way.” Apple University was created to institutionalize what Steve Jobs and his team had learned. The University collected a series of case studies to analyze important decisions made by the company, and the upper management set aside time to teach these cases to new employees in order to embed the Apple Way in the company’s culture. Over the years, Jobs and his team developed this Apple Way and shared Apple’s business philosophy, code of ethics, and management principles with new executives and managers. This also included passing on the

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culture of innovation, product design style, and ease of use approach described above. It is important that the management is on the same page when it comes to executing the company’s vision and strategy. Unlike many other companies with multiple, siloed departments, Apple’s entire management team, and all departments always stay in sync. The biography Steve Jobs reads, “Although Steve Jobs was authoritarian by nature - never a believer in consensus - he worked hard to create a culture of collaboration within the company. While many companies pride themselves on having few meetings, Jobs was unique in doing the opposite: every Monday was the day of an executive meeting, and every Wednesday afternoon there was a marketing strategy meeting, in addition to countless product review sessions. He did not like PPTs or formal speeches; he insisted that all attendees discuss issues together, taking advantage of all sides and hearing the perspectives of different departments.”51 This was because Jobs was convinced that one of Apple’s great strengths was the integration of all types of resources: from design to hardware, software, and content. He wanted all divisions of the company to work in parallel, calling it “deep collaboration” and “concurrent engineering.”52 So, at Apple, a product is not developed in an assembly line from engineering to design, then marketing, and finally distribution, but rather the relevant departments work in parallel. Also worth mentioning is Steve Jobs’ training of his successor. Shortly after he was diagnosed with cancer, Jobs set about seriously sorting out who could be his successor. Thereafter, it became clear to many that Tim Cook was being groomed as his successor, regardless of Jobs’ illness. When Jobs knew he could no longer return to Apple, he said, “One of the things I look forward to doing for Apple is to set an example for how to hand over power properly.“ He was convinced that in order to build Apple into the best company in the world, an orderly transition was critical so that Apple did not relapse into the turmoil of the past. Even companies with strong corporate cultures can deteriorate if the wrong people are entrusted with them. A prime example is HewlettPackard. Jobs mused, “William Hewlett and David Packard created a great company that they thought was in good hands, but now the

51 Walter Isaacson. Steve Jobs. Simon & Shuster, 2011. 362. 52 Walter Isaacson. Steve Jobs. Simon & Shuster, 2011. 362.

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company is in the midst of division and destruction, and it is so sad. If I could leave a stronger legacy, something like that would never happen to Apple.”53 Considering Cook’s success in leading Apple after Jobs’ death, Jobs’ carefully selected successor certainly became one of his key legacies. Cook further elevated Apple’s vision and added his own style to the Apple Way. However, even as Cook left his mark on Apple’s products, management, and direction, one can still see the fundamental role that Jobs’ legacy played in the way the company was managed and its future direction. Apple is still a company driven by Jobs. The outstanding team Jobs prepared behind him and instilled in that team his ideas and vision is a major reason why Apple has succeeded even without his leadership. Eight years after Steve Jobs’ death, Apple’s market capitalization exceeded $1 trillion for the first time in the world. So, we can say that although Jobs is gone, his legacy still lives on at Apple. Near the end of his life, Jobs discussed with his biographer Isaacson the kind of legacy he wanted to leave behind. “I think Apple has stood the test of time,” he said confidently.54 After 2021, we could finally tell whether Jobs has passed the 10-year test for business leaders. In 2023, Apple became the world’s first company with a market capitalization of more than $3 trillion, a milestone that reflects the enduring influence and resilience of its products and services. As for Apple’s future, it will depend on whether it follows Drucker’s advice: “At its inception, a company is often the lengthened shadow of one man. But it will not grow and survive unless the one-man top is converted into a team.”55

53 Walter Isaacson. Steve Jobs. Simon & Shuster. 2011. 558. 54 Walter Isaacson. Steve Jobs. Simon & Shuster. 2011. 568. 55 Hindy Schachter. Words from Peter Drucker Still Valid after All These Years. The

Globe and Mail. https://www.theglobeandmail.com/report_on_business/careers/manage ment/words_from_peter_drucker_still_valid_after_all_these_years/article619041/. Nov. 8, 2011.

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From Good To Great To Unstoppable

Amazon’s fundamental success may lie in its dedication to its customers while being unforgiving to employees, competitors, and suppliers alike.

10.1

Prophets Who Foresee Strong Earthquakes

Whenever the economy is about to face a strong earthquake, there are always some seers who detect the slight trembling of the earth’s crust before all others and act accordingly, and such actions seem so reckless and even a bit foolish. Cornelius Vanderbilt, who ran ferries, saw the beauty of railroads and quickly changed course, eventually becoming a railroad tycoon; Thomas Watson Jr. foresaw the ubiquity of computers when people did not know what they were, creating the perennial information juggernaut IBM. Jeff Bezos’ foray into the Web, or more specifically, e-commerce, has been such a story too. He founded Amazon.com, the largest store on the Web and, potentially, the largest retail empire ever built, where people can buy anything they want. Bezos has done more than anyone else to make the Web a safe place to shop. So at the age of 35, he was named Time’s Man of the Year in 1999. Who are the historical figures that this man of the hour admires most? One was Thomas Edison—a brilliant inventor and not-so-smart businessman; the other was Walter Disney—a pretty good inventor and an excellent businessman. Bezos admired not Disney’s movies but its theme parks, and he visited Disney World several times. Most memorable to Bezos was Disney’s strong vision. “He knew what kind of Dreamland he wanted to build and then organized a group of really good people to build it. No one believed his idea would work, and Disney struggled to get a $400 million loan from the banks. In the end, he succeeded.”56 Like Disney, Bezos’ entrepreneurial story is now a myth. He was inspired to quit Wall Street and go online, wrote the business plan for Amazon Books during a legendary trip out west, and worked day and night in a rented garage in Seattle, starting with an online bookstore and expanding to a variety of other e-commerce products and services, 56 Joshua Quittner. An Eye on the Future. Time. http://edition.cnn.com/ASIANOW/ time/magazine/99/1227/cover1.html. Dec. 27, 1999. 55–56.

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including video and audio streaming, cloud computing, and artificial intelligence. Today, Amazon is the world’s largest Internet company by revenue and, with Amazon Cloud Services (AWS), the world’s largest provider of cloud infrastructure and artificial intelligence. In 1999, when Bezos was named Time’s Man of the Year, online shopping was just beginning to take off. At that time, Bezos was the fourth-youngest of all Time’s Man of the Year, following Charles Lindbergh (age 25 at the time of the award in 1927, the first person to fly a plane across the Atlantic Ocean), an explorer; Queen Elizabeth II (age 26 at the time of the award in 1952), a queen; and Martin Luther King, Jr. (age 34 at the time of the award in 1963), a famous American black activist and revolutionary. As the “father of e-commerce,” Bezos combines the roles of explorer, king and revolutionary, pioneering, and ruling a virtual territory. 10.2

Solving Big Problems in Big Markets

The story of Bezos quitting his job to start his own business is a good reflection of his personality. The guy who would become the richest man in the world turned out to be a wage earner at a Wall Street hedge fund. It was 1994, eight years after Bezos graduated from college, and he was in his thirties. Although he had a lucrative job in the financial industry, he lacked a sense of personal fulfillment. He soon discovered something that made him harbor a sense of urgency—a report that predicted the Web would grow rapidly. “I came across the fact that Web usage was growing at 2,300 percent per year. I’d never seen or heard of anything that grew that fast, and the idea of building an online book store with millions of titles was very exciting to me.” So Bezos recalled when he returned to his alma mater, Princeton University, to speak in 2010.57 He talked about the idea with his boss, who agreed it was a good idea, but warned that it was only a good idea for people who did not have good jobs.

57 Darren Marble. Jeff Bezos Quit His Job at 30 to Launch Amazon—Here Are the 3 Simple Strategies He Used to Do It. Inc. https://www.inc.com/darren-marble/jeffbezos-quit-his-job-at-30-to-launch-amazon-heres-how-to-know-if-its-right-time-for-yourbig-move.html. Mar. 27, 2018.

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Bezos spent a few days considering his boss’s suggestion, and he decided to try a mental exercise. “The best way to think about it is to project my life into my 80s.” A fear of what he might regret in the rest of his life made him want to take the risk. “I do not want to look back on my life when I am 80 and only have a list of regrets,” so I have to “minimize my personal regrets.” After much deliberation, I took a less safe path to follow my passion. One can choose a life of ‘ease and comfort’ or a life of ‘service and adventure.’ The latter will make you proud at age 80.58

This principle of “minimal regret” is based on the premise of unique insight. Bezos did not enter the e-retailing space blindly. He researched 20 retail markets that he imagined would be disrupted by e-commerce, and finally set his sights on books: a massive $82 billion market with no obvious dominant player, where the products are so low cost that it can be sold to anyone, anywhere.59 What can entrepreneurs learn from Bezos’ experience? Seek out insights that few people know about; enter emerging industries early; and, most importantly, work to solve problems in large markets. Back in 2000, Amazon.com was still just an e-commerce company facing scale challenges. These issues forced the company to build a solid internal system to cope with the rapid growth it was experiencing. In the early stages, the system consisted of only a few different tools and services. In late 2003, faced with a rudimentary infrastructure that could not handle the rapid traffic, Chris Pinkham and Benjamin Black presented a paper to Bezos describing a vision for Amazon’s retail computing infrastructure that was fully standardized and automated, and would largely rely on the network to provide services such as storage. At the end of the paper, they mention the possibility of selling access to virtual servers

58 Courtney Connley. Jeff Bezos Says This Exercise Convinced Him to Quit His Wall Street Job and Launch Amazon. CNBC. https://www.cnbc.com/2017/11/06/this-exe rcise-convinced-jeff-bezos-to-launch-amazon.html. Nov. 6, 2017. 59 Darren Marble. Jeff Bezos Quit His Job at 30 to Launch Amazon—Here Are the 3 Simple Strategies He Used to Do It. Inc. https://www.inc.com/darren-marble/jeffbezos-quit-his-job-at-30-to-launch-amazon-heres-how-to-know-if-its-right-time-for-yourbig-move.html. Mar. 27, 2018.

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and suggest that the company reap the benefits of the new infrastructure investment.60 Pinkham and Black showed Bezos a picture of the future: college students could start a company in their dorm rooms with Amazon’s services. Bezos admired the idea, and AWS took off. Three years later, Amazon launched its “infrastructure as a service” (IaaS, though the term may not have come up until later), which allows any organization, business, or developer to run applications on its technology architecture platform. From the conception of the AWS idea to its successful implementation, Bezos once again proved his methodology: to be brave enough to have a bet, not afraid to fail, and dare to challenge conventional wisdom. Such betting strategy spawned the first modern cloud service, and it took years for competitors to respond. “For the first seven years we never met a competitor with the same idea. It was incredible,” Bezos said later. AWS engineer James Hamilton wrote a retrospective article in 2016 about AWS’s decade-long struggle from 2006 to 2016. He commented on the disruptive nature of AWS this way: Most startling was the cost of the service. It was nearly 2 orders of magnitude less expensive than we were currently paying for multi-data center redundant storage. But what was even more disruptive was a credit card all that was needed to provision storage. There was no required proposal for financial approval; there was no RFP, no vendor selection process, no vendor negotiation, and no data center space need be found. I could just sign up and start working. What was at least as notable as the low cost and ease of provisioning was that the announcement came from Amazon rather than a traditional enterprise IT player. Rather than a company that is dedicated to high margins, difficult negotiations, and sometimes even license usage audits, this service came from Amazon. What looks to be “large” margins at Amazon would have shareholders at most enterprise IT companies calling for immediate management change. This was really different. A different supplier, a different model, a low friction provisioning path, and a fundamentally different price that starts low and falls rather than escalating over time.61 60 Benjamin Black. EC2 Origins. http://blog.b3k.us/2009/01/25/ec2-origins.html. Jan. 25, 2009. 61 James Hamilton. A Decade of Innovation. Perspectives. https://perspectives.mvd irona.com/2016/03/a-decade-of-innovation/. Mar. 14, 2006.

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At the beginning of AWS development, Amazon was a publicly traded company that had been profitable for just two years. At the company’s shareholder meetings, many shareholders took issue with AWS’s business: selling storage and computing services for our own operations to other companies? What does this have to do with an e-commerce company? However, Bezos, who strongly believes in the value of AWS, did not care. When AWS was officially launched in 2006, most people still did not understand it, seeing it as another money-burning delusion from the maniacal Bezos. In the October cover story “Jeff Bezos’ Risky Bet” in Business Week, a Wall Street analyst complained that the AWS line of business is a complete sign that Amazon is not on the right track. Even Tim O’Reilly, an industry analyst who recognized Bezos’ strategic intentions early on, thought Amazon had little chance of winning against Microsoft and Google down the road.62 Ten years on, AWS grew to become the world’s most successful cloud infrastructure company, winning more than 30 percent of the market, outpacing its three closest competitors combined—Microsoft, IBM, and Google (and retaining considerable profits). In 2018, Amazon’s market share rose further to 40 percent, with Microsoft (17 percent), Google (8 percent), and Alibaba (5 percent) behind it. However, cloud services are still in their infancy, with Gartner forecasting that the global IaaS market will grow to $71.5 billion by 2020.63 With the strong growth of its AWS business, Amazon’s stock price has gone through the roof, and on September 5, 2018, its market capitalization even surpassed that of its once unreachable rivals, Microsoft and Google, catching up with Apple to become the second company in the world to break the trillion dollar market cap.64 Amazon’s former sidetrack (retail company doing cloud services? You would have laughed at it back in the day) now makes it an Internet computing giant. There is hardly a startup that is not running on AWS.

62 Robert Hof. Ten Years on, Jeff Bezos’ “Risky Bet” on Amazon Web Services Pays off Big. Silicon Angle. https://siliconangle.com/2016/03/14/ten-years-on-jef-bezos-riskybet-on-amazon-web-services-pays-off-big/. Mar. 14, 2016. 63 The Secret of Amazon AWS Rise Journey: From Free Service to Market Leader. Tencent Technology. https://tech.qq.com/a/20190428/000343.htm. Apr. 28, 2019. 64 Sara Salinas. Amazon Reaches $1 Trillion Market Cap for the First Time. CNBC. https://www.cnbc.com/2018/09/04/amazon-hits-1-trillion-in-marketvalue.html. Sep. 4, 2018.

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AWS is also critical to the digital operations of major companies from General Electric to Netflix, which runs all its streaming video on Amazon. Once again, Bezos is seeing the future of computing as no one has seen it before, as it turns out. AWS can already be etched in history alongside HP, IBM, Microsoft, Google, Facebook, and other companies that have created the computing business. 10.3

The Revolution in Business Automation

For the earliest e-commerce pioneers, the choice of products to sell was extremely critical. In the “wilderness era” when all e-commerce support services were not yet optimized, there was no better commodity than books. Books do not need to try on, with standard appearance and relatively low price of each SKU, and featuring convenient storage, easy distribution, and resistance to damage. Most importantly, the publishing industry has a large inventory, and online bookstores can leverage the long-tail effect of the Internet to make it easy for many people who cannot find the book they want in a brick-and-mortar bookstore to place an order. From the beginning, Bezos did not consider himself a bookstore owner, preferring to appoint himself as an information broker, facing booksellers and publishers looking for customers on the one side and customers looking for books on the other. His success proves that the middleman will not disappear in the digital economy, but will be redefined. As a new type of middleman in the information age, Amazon’s approach caught traditional bookstores off guard at the outset. Firstly, because no real-life bookstore could sell such a wide variety of things; secondly, because no physical bookstore could serve such a geographically dispersed and vast customer base; thirdly, because Amazon is not only a huge retail empire, but also a huge information empire. Drawing on his own experience working on Wall Street (using algorithms to squeeze the full benefit out of every transaction), Bezos established a strategy early on: to have more data about each customer so as to give his/her a unique and irresistible choice. The fourth reason is that Amazon does not have physical displays like traditional bookstores and does not have the pressure of excessive inventory management; its power is information, and expensive costs, space rent, and labor costs have been significantly cut, resulting in

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a significant change in the profit structure. So with what do traditional bookstores compete with it? Barnes & Noble, the largest bookstore chain in the United States, would never have imagined in any case that its threat came from Bezos, who knew nothing about the publishing industry. In 1996, Amazon’s sales were $16 million, compared to Barnes & Noble’s $2 billion. Today, Amazon has about half of the print book market, while Barnes & Noble has only one-fifth; Amazon’s e-book share is 84%, while Barnes & Noble has only 2%; Amazon’s market capitalization hovers around a trillion dollars, while Barnes & Noble’s is only $475 million, or about 0.05% of Amazon’s.65 Bezos is a no-nonsense business genius who saw the opportunity to conquer the entire world using online bookstores as a cut-through at a time when the Internet was just emerging. However, books were just his entry point, and his ambition was to become the center of the entire ecommerce universe. Long before Google and Facebook, Bezos realized what was the most valuable asset of an online company—user data. With enough user data collected, Amazon could figure out a way to sell all the other cheap goods on the Internet. Sure enough, 20 years later, you can buy all sorts of things on Amazon: lawn mowers, iPods, artwork, sex toys, diapers, shoes, bike racks, 3D printers, and everything in between. Amazon has become what corporate biographer Brad Stone calls “the everything store.”66 At any given time, there are more than 3 million sellers on its website selling more than 600 million items.67 What makes Amazon an all-inclusive platform is not only its own business, but also the third-party sellers who are active in the Amazon Marketplace. Amazon launched its e-commerce platform Marketplace in November 2000, allowing third parties to set up store on Amazon.com and take advantage of Amazon’s traffic, user base, infrastructure, and brand reach to sell primary or secondary products. Products can be delivered through Amazon (fulfillment by Amazon, FBA) or sellers themselves 65 Erica

Pandey. How Barnes & Noble, the Last Big Bookstore, Fell to Amazon. Axios. https://www.axios.com/barnes-and-noble-book-stores-sale-amazon-eff ect-4f2753d2-818c-49d1-878a-60f0c3a5b3f7.html. Oct. 7, 2018. 66 Brad Stone. The Everything Store: Jeff Bezos and the age of Amazon. Little, Brown and Company, 2013. 67 Franklin Foer. Jeff Bezos’s Master Plan. The Atlantic. https://www.the-atlantic.com/ magazine/archive/2019/11/what-jeff-bezos-wants/598363/. Nov. 2019.

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(fulfillment by merchant, FBM). Through the platform model, Amazon greatly satisfies the long-tail needs of users; at the same time, it relies on charging commissions to obtain platform profits and also makes full use of Amazon’s logistics, servers, and other infrastructure. In order to improve the ecology of e-commerce, for decades, Amazon has been innovating both internally and externally. In 1996, Amazon introduced the concept of “affiliate marketing,” which allows website owners and bloggers to add affiliate links, and if customers click these links to buy Amazon products, the website owners and bloggers will earn affiliate commissions. Amazon was the first company to launch an affiliate marketing program online. To simplify the shopping process and shorten the shopping circle for consumers, Amazon invented and patented the “1-Click Checkout” in 1997. Users who have already completed a purchase on the site, i.e., have already saved information such as payment and address, do not need to submit this information in subsequent purchases, but can complete the purchase with a single click. In 2005, Amazon launched Amazon Prime, a service that offers free two-day delivery for Prime members on all items sold on Amazon.com. In 2019, delivery times were shortened again, with one-day shipping by default for all Prime members. To do this, Amazon spent billions of dollars to develop warehouses and distribution. The service now has more than 100 million paid members.68 In 2007, Amazon Fresh and Amazon MP3, an online music store, went live, and Kindle, an e-reader, was launched. In 2009, Amazon acquired Zappos, the largest online shoe store. In 2010, Amazon acquired Quidsi, which owned a series of niche e-commerce sites. In the same year, Amazon Studios was founded and began producing and distributing movies and videos. The Kindle Fire tablet with a customized Android system was released in 2011. In 2014, Amazon acquired Twitch.tv, a live game streaming platform, and comiXology, a digital comics distribution platform, and incorporated Amazon Publishing, which publishes printed materials, e-books, audio, and Kindle series. In the same year, the smart speaker Echo was launched with built-in voice assistant Alexa, developing into one of the most popular smart appliances in the market, and Amazon thus launched an attack on the traditional home appliance industry. 68 Don Reisinger. Amazon Prime Has More Than 100 Million U.S. Subscribers. Fortune. https://fortune.com/2019/01/17/amazon-prime-subscribers/. Jan. 17, 2019.

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In 2016, Amazon challenged Netflix and Hulu with the global launch of Prime Video, a standalone streaming video subscription service. It now boasts thousands of free TV shows, movies, and games that users can access on virtually every available screen. The movie division also spun off from Amazon Studios to form Prime Movies. Amazon Movies and TV production has become a Hollywood heavyweight, winning back-to-back Emmys and Oscars as a major part of many Americans’ entertainment. Amazon’s acquisition of Whole Foods for $13.7 billion in 2017 proved once again that Bezos is willing and able to “buy” its way into new markets when he cannot do it from scratch. It now uses Whole Foods pickup and delivery perks and in-store discounts as a way to reward Prime members. It has also used its considerable resources to lower Whole Foods’ prices, giving it an edge against Kroger, Target, and Walmart. In response, Walmart has begun investing heavily in ecommerce and grocery delivery to protect its turf from Amazon, and thus, an unprecedented retail battle is close at hand. In 2018, Amazon Go, an unmanned supermarket, opened, replacing cashiers with a computer vision system that automatically detects when customers have taken items off the shelves and checks them out as they leave the store. Bloomberg reports that Amazon could open as many as 3,000 unmanned supermarkets by 2021 to compete with stores such as CVS and 7–11, as well as convenience food outlets.69 This shows that Amazon is competing with its retail rivals on all fronts. Bezos’ goal is to make it as easy as possible for customers to find the goods they want online at the lowest price and with the best service. He spared no effort to do so. Amazon built a software early on that was able to search the Web for competitors’ price information and then automatically match the lowest price to achieve low price competition. Amazon routinely ignores retail traditions regarding minimum pricing. It has also worked hard to reduce delivery times. Bezos believes that fast delivery services will change customers’ spending habits: when online shopping becomes easy, customers will increase their spending and also the frequency of their purchases, thus ensuring their loyalty, while logistics and shipping costs are reduced.

69 Nick Statt. How Amazon’s Retail Revolution Is Changing the Way We Shop. The Verge. https://www.theverge.com/2018/10/23/17970466/amazon-primeshopping-behavior-streaming-alexa-minimum-wage. Oct. 23, 2018.

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This makes Amazon a global supermarket. As the largest retailer of cleaning products and household goods in the United States, Amazon competes with Walmart, Target, and Bed Bath & Beyond; as a clothing and footwear retailer, it splits the market with DSW, Foot Locker, and GAP; as a distributor of music, books, and television, it wrestles with Barnes & Noble, Apple, Netflix, and HBO; it also makes hardware like Apple, offers utilities like Edison United Electric, publishes books like Random House, makes movies like Paramount and auctions like Sotheby’s, and may one day provide delivery services like UPS. If the industrial revolution of the nineteenth century and the computerization of the twentieth century brought about a revolution in industrial automation, the Internet-based e-commerce set off by Amazon has brought about a revolution in business automation in the twenty-first century. It has permanently changed the operation of commerce as we know it, changing the way and behavior of transactions and creating new ones. 10.4

The Water System of the Largest River

Let us look at where the business automation revolution pioneered by Amazon is headed. The company is named after the world’s largest river, with its tributaries flowing in all directions. A rapidly changing logistics industry One of the biggest things happening in the e-commerce world is that the logistics industry is changing rapidly. And Amazon has been at the forefront of this trend. Without infrastructure, Amazon would be nowhere. The ever-stronger physical and digital foundations of commerce and the logistics operations that support it have allowed Amazon to grow faster than almost any other company in modern history, and it is in these areas that its most forwardthinking projects and most costly efforts can be found. Amazon has managed to translate its dominance of the online retail market into strong bargaining power in the distribution industry, allowing it to reach agreements with third-party logistics companies in its favor. In 2006, Amazon introduced Amazon Delivery to provide logistics and delivery services to independent sellers. Merchants who sign up for the

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Amazon Delivery service will store their goods in Amazon’s warehouse, and Amazon will pack, deliver, and provide after-sales service for all orders. Products delivered through Amazon are eligible for Amazon Prime membership, which in turn allows Amazon to further strengthen its dominant position over other retailers. Amazon has invested heavily in warehouse facilities and parcel sorting centers. Today, Amazon has 288 million square feet of warehouses, offices, retail stores, and data centers.70 Amazon’s logistics division not only has trucks delivering packages to streets across the United States, but it has also built an emerging empire in logistics by expanding its air and sea freight business and using innovative delivery methods such as robots and in-car delivery (delivering packages directly to the trunk of customers’ cars) to get products from manufacturers to customers at speeds once thought to be impossible. In an effort to increase automation, Amazon has begun deploying packing robots in its warehouses. Amazon currently uses more than 100,000 robots in its warehouses around the world to help move and organize products. It also sponsors an annual robotics competition to spur innovation in artificial intelligence, resulting in more dexterous and intelligent robots that can perform complex physical tasks.71 Automated picking and automated warehouse logistics systems have been in development for some time, yet transportation and handling out of the warehouse still rely on a large number of manual executions, making autonomous driving an immediate priority for e-commerce companies, logistics companies, and outbound delivery providers. While we have all heard of self-driving cars, many people do not realize that trucks are also using this technology. In January 2019, Amazon began experimenting with self-driving trucks developed by the self-driving startup Embark to transport goods.72 If trucks are self-driving, then

70 Alexis C. Madrigal. When Amazon Went From Big to Unbelievably Big. The Atlantic. https://www.theatlantic.com/technology/archive/2019/02/whenamazon-went-from-big-to-unbelievably-big/582097/. Feb.7, 2019. 71 Nick Statt. How Amazon’s Retail Revolution Is Changing the Way We Shop. The Verge. https://www.theverge.com/2018/10/23/17970466/amazon-primeshopping-behavior-streaming-alexa-minimum-wage. Oct. 23, 2018. 72 Lora Kolodny. Amazon Is Hauling Cargo in Self-driving Trucks Developed by Embark. CNBC. https://www.cnbc.com/2019/01/30/amazon-is-hauling-cargo-in-selfdriving-trucks-developed-by-embark.html. Jan. 30, 2019.

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robots could deliver things anywhere, anytime, and make roads safer (but then of course put truck drivers out of work). While there is currently skepticism about the reliability and accuracy of these systems, there is no doubt that advanced software and technology could one day change e-commerce forever by solving the “last-mile” problem. In addition to self-driving cars, Amazon has been investing heavily in a drone delivery service (Prime Air).73 This is another potential answer to the last-mile problem mentioned above. Of course, as exciting as these innovations are, they will require a great deal of improvement before they can be truly implemented in the marketplace. The end result of Amazon’s investment in robotics and artificial intelligence with its daunting power, however, is that the fast-growing workforce in the technology industry may slow its momentum and may shrink as robots learn to handle increasingly complex tasks. Amazon has already changed the way we shop, which in turn has changed the way we live, and the next step may well be to change the way we work. The rise of the multilateral marketplace Another innovation spearheaded by Amazon is the rise of multilateral marketplaces. The Marketplace platform maintains a cohesive set of online resources through rigorous governance, standards development, and user reviews/feedback. For users, this one-stop shop helps them access any item they need. Based on user preferences and behavior patterns, Amazon uses algorithms to further optimize their experience, and data is used to optimize the platform’s interface and functionality for buyers and sellers to make it more intuitive and instantly responsive. Over the past 10 years, Amazon has proven to be a lucrative platform for resellers. But dealers are also well aware that it is a double-edged sword. One merchant observed, “You cannot be a big seller if you do not operate on Amazon, but sellers are well aware that Amazon is also a major competitor.” Some merchants accuse Amazon of seemingly surreptitiously using Marketplace as a large laboratory for discovering new products, testing their sales, and tightening control over pricing: third-party sellers bear the initial cost and uncertainty of introducing new products; once 73 Linda Baker. Amazon Prime Air VP Touts Environmental, Safety Benefits Of Drone Delivery. Freight Waves. https://www.freightwaves.com/news/amazon-prime-air-vp-laysout-vision-for-future-drone-delivery-with-video. Oct. 3, 2019.

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they are verified, Amazon simply needs to discover them and start selling them, even by manufacturing them themselves to compete at lower prices. Amazon has cultivated its own strong power through multilateral marketplaces, as Lina Khan, a scholar at Yale Law School, points out in her article Amazon’s Antitrust Paradox that the sources of this power include (1) a dominant position as a platform that independent distributors are compelled to use; and (2) vertical integration, both as a seller selling its own products and as a marketplace where other merchants sell; and (3) the ability to collect large amounts of data as an Internet company. Control of data is the platform’s greatest competitive advantage, and Amazon is quite aware of the opportunities this presents for itself. Lina Khan gives a striking example: startups are using Amazon’s cloud services, so by watching whether they increase their use of cloud services, Amazon can make an early assessment of the potential success of the business. Amazon has invested in several startups by leveraging its “single window to the tech startup world.”74 Amazon now has more than 100 private brands, with Amazon Basics focusing on everyday items that people will buy without hesitation, and Amazon Essentials, a men’s and women’s apparel brand, that have become Amazon’s biggest weapons against offline retailers. Just as Walmart and Target and other stores have launched private brands in almost every line imaginable, Amazon has done the same thing. Now you can buy electric kettles, toasters, office chairs, knives, dumbbells, quilts, suitcases, and mattresses made by Amazon. Artificial intelligence enters the home Thousands of products are now integrated with Amazon’s Alexa platform to take advantage of its voice search and query capabilities. Just as ecommerce, streaming media, and cloud computing were once seen as the future of the Internet, Amazon is betting that artificial intelligence will not only exist in smartphones (like Apple’s Siri), but will surely reside in the home as well. The Echo series and its assistant Alexa are Amazon’s way into our physical lives and digital behavior. Amazon believes that users want

74 Lina M. Khan. Amazon’s Antitrust Paradox. The Yale Law Journal. 2017, 126 (3): 710–805. https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

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future devices that will listen, respond, and solve problems accordingly, just like people do. Competition in this space is fierce, primarily from Apple and Google, but Amazon’s early investments in smart speakers and artificial intelligence have helped it make up for its absence in key consumer markets such as mobile, search, and social networking. As a result, Amazon has made tangible progress in developing an ecosystem that reaches into everyday life and that users are finding it increasingly difficult to abandon. Since Alexa’s introduction in 2014, Amazon and its partners have sold more than 100 million Alexa-capable devices, including wireless speakers, smart clocks, thermostats, fragrant emitters, and even toilets. It has also been aggressively expanding Alexa’s capabilities, doubling the number of “skills” or tasks it can perform. People are starting to expect Alexa to be everywhere, whether they are in the car, on foot, taking public transit, walking the dog, or going to work. When they are in these situations, they want Alexa to remind them to take out the trash or bring back the laundry from the dry cleaners. Fortune magazine commented, “Regardless of their future performance in the marketplace, these devices speak loudly and clearly of Amazon’s more ambitious blueprint to extend its services to every home, every car and every person.”75 A closed ecosystem At first glance, you may ask: Is there a typo? Should not the word “ecosystem” always have the prefix “open”? When Bezos entered Hollywood, he justified Amazon’s investment in entertainment with a chaffing remark: “If we win the Golden Globes, it will help us sell more shoes.”76 It was a deliberate flippancy meant to show that Amazon is different from its competitors. But it actually hints at Bezos’ true psychology: Amazon is more than a streaming provider (like Netflix) or a series of channels (like Comcast), though it is both of those. At its core, Amazon is a closed ecosystem, and it ventures into 75 Amazon Speakers Will Change the Senses with Poor Sound Quality in New Products. FortuneChinese.com. http://app.fortunechina.com/mobile/article/347 960.htm. Oct. 13, 2019. 76 MCALONE N. Amazon CEO Jeff Bezos said something about Prime Video that should scare Netflix. Business Insider. https://www.businessinsider.com/amazon-ceo-jeffbezos-said-something-about-prime-video-that-should-scare-netflix-2016-6. June. 2, 2016.

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video products because the latter constitute a relatively inexpensive way to convince people to live in its system. Amazon’s goal is reflected in one of the metrics it uses to judge the success of its shows. It examines the viewing habits of users who sign up for a free trial of Amazon Prime and then calculates how many new subscriptions to the service a show generates. When weighing a show, Amazon considers the relationship between the show’s production costs and the number of new subscriptions it brings in.77 In fact, Amazon’s Prime membership service has never been limited to just selling goods. One could even argue that it was not until 2005, with the debut of Amazon Prime, that Amazon began laying the groundwork for a future digital media ecosystem integrated directly into its online store. Amazon Prime began as a membership program for loyal Amazon shoppers who paid just $79 for unlimited two-day delivery. It was not until 2011 that it began providing additional services: bundling with other products or services, such as streaming media like e-books, music, and video; offering free online photo storage and one-day or sameday delivery. Since then, Amazon Prime has evolved into a subscription service, with members enjoying a number of additional perk “bonuses,” including an Amazon Prime credit card with 5 percent cash back. When Amazon Prime was first created, Bezos insisted that the price be set high enough to make the membership program feel like a real commitment. Sunil Gupta, a professor at Harvard Business School, analyzed the brilliant move, saying, “Amazon Prime started out at $79 with the benefit of free two-day shipping. Most smart people do the math and ask: Is $79 worth it? Bezos’ answer is, I do not want you to do the math. I am going to put in movies and other benefits that make the value calculation difficult.”78 Bezos was betting that consumers would make this considerable expenditure worthwhile by spending faithfully at Amazon. The fact that Amazon Prime subscribers exceed 100 million worldwide proves that this is a master stroke of behavioral economics. According to analysts’ reports, after becoming a Prime member, customers’ purchases at 77 Franklin Foer. Jeff Bezos’s Master Plan. The Atlantic. https://www.the-atlantic.com/ magazine/archive/2019/11/what-jeff-bezos-wants/598363/. Nov. 2019. 78 Franklin Foer. Jeff Bezos’s Master Plan. The Atlantic. https://www.the-atlantic.com/ magazine/archive/2019/11/what-jeff-bezos-wants/598363/. Nov. 2019.

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Amazon increased by 150%. Prime members account for nearly 50 percent of Amazon customers in the United States. Prime members spend significantly more on Amazon.com than non-members—an average of $1,500 per year, while non-members spend only $625 per year.79 With its free delivery service, Amazon Prime has successfully helped consumers solve the biggest burden in online shopping. What are the results? Consumers will further increase their spending at Amazon. As with other programs, Amazon is losing money on its Prime membership service in exchange for growth in subscriber numbers. By 2011, it was estimated that Amazon was investing at least $90 per year per Prime member—$55 for delivery services and $35 for audiovisual products—thereby bringing in a loss of at least $11 per year per Prime member. Amazon has invested heavily in warehousing, delivery, and vehicle equipment to speed up the delivery service for Prime members, all of which has led to increased costs for Amazon Prime. However, even with losses amounting to billions of dollars per year, Amazon Prime is still identified as the core of Amazon’s online retail growth. The reason is simple: despite the membership fees that Amazon Prime generates, Bezos is not trying to make money from the Amazon Prime service itself, but rather to use the service to inspire users to buy. Keep in mind that the more frequently Amazon Prime users spend on Amazon, the more they will also spend less on other platforms. Sixty-three percent of Amazon Prime users purchase at least one product every time they visit the site, compared to just 13 percent of non-Amazon Prime users. For Walmart and Target, the numbers are 5 percent and 2 percent, respectively. The study shows that less than 1 percent of Amazon Prime users would consider a shopping site other than Amazon for the same purchase, while more than eight times as many non-Amazon Prime users would consider both Amazon and Target than Amazon Prime users. According to a former Amazon employee who works on the Amazon Prime team, “It is not a $79 thing. It is completely changed the user, and they will not go elsewhere to buy anything else.”80 In 2014, Amazon raised the annual fee for Prime membership to $99; in 2018, it rose to $119. This is Amazon’s usual trick: first attract users 79 Lina M. Khan. Amazon’s Antitrust Paradox. The Yale Law Journal. 2017, 126 (3): 710–805. https://www.yalelawjournal.org/note/amazons-antitrust-paradox. 80 Lina M. Khan. Amazon’s Antitrust Paradox. The Yale Law Journal. 2017, 126 (3): 710–805. https://www.yalelawjournal.org/note/amazons-antitrust-paradox.

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and then slowly pull up the price of products and services. The price increase did anger some users, but the survey showed that 93% of Prime members continued to join after the first year; and after the second year, the percentage rose to 98%.81 This shows that Amazon did retain many users, while no competitor was able to offer a similar service at a lower price. Lina Khan believes that this point may also illustrate the often sticky nature of the online platform model. While competition in the online services space may seem fierce and “just a click,” research on behavioral patterns suggests that the “switching costs” of changing service sites can actually be very high.82 Bezos has succeeded in making shopping at Amazon a habit. If you take the old view, you might think Amazon is just a retailer, but it is also a movie studio, an artificial intelligence developer, a device maker, and an Internet service provider; but if you call it a conglomerate, that is not accurate either, because its many businesses are tightly integrated and interconnected. The best description of Amazon is a closed ecosystem with countless tentacles that encompass the right prey into the system. This description implies that there are no natural boundaries to Amazon’s expansion. No sector of the economy inherently extends beyond its core competencies. According to Ben Thompson, founder of technology newsletter Stratechery, Amazon wants to “offer everything to everyone” and when everything flows through Amazon, the company can “tax” a range of unexpected transactions. For example, when Amazon sells subscribers to premium cable channels such as Showtime and Starz, it reportedly cuts prices by 15 to 50 percent. When an item is in an Amazon warehouse waiting to be purchased, the seller pays rent. Amazon allows vendors to buy top spots in its search results (and then mark those results as sponsored) and carve out space on their own pages and rent them out as advertiser space.83 All of this is possible because Amazon’s versatility, agility, and ability to dip its toe into multiple areas has allowed it to

81 Lisa Johnston. There Are 103 Million U.S. Amazon Prime Members: CIRP. Twice. https://www.twice.com/retailing/amazon-prime-subscribers-2019. Apr. 22, 2019. 82 Lina M. Khan. Amazon’s Antitrust Paradox. The Yale Law Journal. 2017, 126 (3): 710–805. https://www.yalelawjournal.org/note/amazons-antitrust-paradox. 83 Franklin Foer. Jeff Bezos’s Master Plan. The Atlantic. https://www.the-atlantic.com/ magazine/archive/2019/11/what-jeff-bezos-wants/598363/. Nov. 2019.

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stand at the center of Internet commerce and even become the infrastructure that other businesses need to rely on. If a company hopes to gain Amazon’s economies of scale, it must pay a corresponding price. Amazon has been described as the hardest company on earth to beat. Its strength lies not just in its so-called economic moat or in Bezos’ brutal approach to growth at the expense of profits, but in the fact that it is built brick by brick with a service-oriented architecture that successively turns each part of the company into a separate platform that then competes externally, while these platforms create powerful synergies when competing. 10.5

The Flywheel Effect Overcomes the Doom Loop

Bezos has a “flywheel theory” for building a service-oriented architecture, as shown in Fig. 2. The customer experience is key, and any action taken by Amazon is predicated on customer needs, with customer service as the first priority for all employees. An outstanding customer experience drives increased visits to the site. Sellers are attracted to put their products on the site. This creates a wider selection of products for customers. At the same time, the growth in site sales allows Amazon to reduce structural costs and lower prices, which along with the customer experience increases traffic.

Reduce price Reduce structure cost

Selection

Customer experience

Seller Growth Traffic

Fig. 2 Amazon flywheel

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The segments are like biting gears—a good customer experience increases site traffic, which in turn attracts more sellers, and in turn a better customer experience. Once the flywheel starts to kick in, each element continues to strengthen and take on a life of its own, driving the overall high growth. The Amazon Flywheel (also known as the “Amazon virtuous cycle”), hand-drawn by Bezos on a napkin in 2001, is a strategy that uses the customer experience to drive customers to the platform and to thirdparty sellers.84 It is not only a tool, but also a way of thinking and a way to seize opportunities in an inefficient industry. At the same time, it helps accelerate growth by investing as much as possible in the customer experience. When Amazon.com was launched in 1995, Bezos stated that Amazon’s mission was to be “Earth’s most customer-centric company,” where customers could find anything they might want to buy online, and the site strove to offer them the lowest possible prices.85 The company has gotten bigger since it started, but its focus has never changed: staying focused on the customer, not on Wall Street and short-term profitability. Bezos was betting that investors would continue to put in a lot of money as long as Amazon kept growing like crazy, and that a profit-oriented Wall Street would therefore not focus too much on profits. Amazon did not have a profitable quarter until 2001, but it still has not made much net profit since. It is this reinvestment of profits that has created Amazon’s worldrenowned infrastructure. When the company experienced significant growth, two options existed: one, report profits to Wall Street, increase the stock price, pay dividends, and make shareholders happy; or two, reinvest the money earned in the business, not caring about the stock price, while ignoring the lamentations of experts about low-margin businesses. The implementation of the flywheel strategy became a recipe for Amazon’s success. In the early days, the virtuous circle was simple (and not much different from Walmart’s approach): lower prices to encourage more customers to visit, then attract third-party sellers, thus increasing the utilization of Amazon’s infrastructure. Soon, however, Amazon Prime became the central flywheel that drove the business forward.

84 https://www.amazon.jobs/zh/landing_pages/about-amazon. 85 https://www.amazon.jobs/zh/working/working-amazon.

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If we look at the annual Amazon Prime Day, the big global shopping event for Prime members, it is clear that it has less to do with short-term sales (impressive as they are) and more to do with driving Amazon’s business consistently over the long term. It is all about getting the flywheel spinning faster, which is why Amazon Prime Day is more than just a sales event.86 First and foremost, it is a major member recruitment event. The only way to make the most of Amazon Prime Day is to become a Prime member, and this is thus the main driver of Prime Membership growth. Amazon says it ushered in more new members on July 16 than on any other day in its history. These new members are extremely valuable: in addition to the annual fee ($119), Prime members spend an average of $800 more per year on purchases than non-members. Secondly, it is a great time to sell Amazon devices. Amazon discounts its devices heavily on Amazon Prime Day, with the goal of bringing more users into its ecosystem and accelerating the flywheel. The strategy was successful: nearly half of Amazon shoppers had an Alexa-connected device after Amazon Prime Day 2018, and the top-selling item worldwide at the shopping festival was the Fire TV Stick with Alexa Voice Remote. Echo products, especially those with screens, were put into carts in large numbers, and Echo owners are Amazon’s most loyal and frequent consumers, spending $400 more per year than the average Prime member. Thirdly, it amounted to a major training program on how to shop on Amazon. In preparation for Prime Member Day, Amazon offered incentives to shoppers to try out certain features in the app, such as AR View and Camera Product Search. Amazon also allowed those who shopped through Alexa to close Amazon Prime Day deals early, even offering a $10 Prime Membership credit for first-time voice shoppers. The more channels and features users access, the better it is for Amazon, so they are actively training shoppers to interact in new and different ways. Finally, it kicked off a very typical omnichannel marketing campaign. Amazon now owns Whole Foods, and customers who spend in-store receive cash back that can be used for Amazon Prime Day purchases. Shoppers who pay with their Amazon Prime Rewards cards in stores during specific time periods receive cash back equal to twice the regular 86 Jon Bird. Feeding The Flywheel: Why Amazon Prime Day Is So Much More Than A Sale. Forbes, https://www.forbes.com/sites/jonbird1/2018/07/22/feeding-the-flywheelwhy-amazon-prime-day-is-so-much-more-than-a-sale/#5d61f1d842db. Jul. 22, 2018.

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cash back. All these incentives aim to drive the flywheel to spin at a faster speed. Bezos has taken the Flywheel Effect proposed by Jim Collins to the extreme. The premise is simple: a flywheel is an incredibly heavy wheel that requires tremendous force to push; and once pushed, it requires more effort until it starts to generate its own impulse—and that is when a company goes from good to great. Companies must be brave enough to change, but change management is always an art that is not easy to master. One of the most popular sayings about “change” is that big changes must be violent, extreme, and painful, because it is a discontinuous, disruptive break. Collins spent five years studying what turns a good company into a great company, and he concluded that there is no miraculous moment of change in a company that goes from good to great. Change is not so much an operation as a process of growth. It is not a blinding flash of lightning or a sudden revelation from the heavens, but the triumph of continuous practice over temporary fixes.87 To capture the transformation from good to great, picture an egg just sitting there. No one pays it much attention until, one day, the egg cracks open and out jumps a chicken! Cracking the egg is simply one more step in a long chain of steps leading up to that moment. Collins says that in all great companies, it is the flywheel effect that overcomes the doom loop. What does the Flywheel Effect mean? Now imagine that your company is a flywheel, and your task is to get the flywheel rotating on the axle as fast and long as possible. Pushing with great effort, you get the flywheel to inch forward, moving almost imperceptibly at first. You keep pushing and, after two or three hours of persistent effort, you get the flywheel to complete one entire turn. You keep pushing, and the flywheel begins to move a bit faster, and with continued great effort, you move it around a second rotation. You keep pushing in a consistent direction. Three turns … four … five … six … the flywheel builds up speed. Then, at some point—breakthrough! The momentum of the thing kicks in in your favor, hurling the flywheel forward, turn after turn … whoosh! … its own heavy weight working for you. You are pushing no harder than during the first rotation, but the flywheel goes faster and faster. 87 Jim Collins. Good to Great. Fast Company. https://www.fast-company.com/43811/ good-great. Sep. 30, 2001.

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By the same token, rather than relying on a big change program, you push the wheel with your own shoulders. You and your team set out to gradually and continuously turn this flywheel. When people begin to experience the magic of “impulse”—when they see visible results and can feel the flywheel begin to build acceleration—that is when they form a formation and put their shoulders to the wheel or push it. And the flip side of the flywheel effect is the doom loop. Companies caught in the cycle of doom want to implement change, but they lack the “practice” that secretly triggers the flywheel effect. Instead, they make a lot of noise about their change agenda and prepare to “recruit.” They embark on a path just to change direction. After years of wandering back and forth, these companies find that they are not able to develop any kind of sustained momentum. Instead of turning the flywheel, they were caught in a cycle of doom: disappointing results lead to a lack of understanding, which in turn leads them to a new direction (new leadership, new agenda), and a lack of momentum in the new direction. Without this momentum, the results are bound to be disappointing. It is a steady downward spiral. Those who have experienced the doom loop know how it drains the spirit of a company. No matter how dramatic the end result, good-to-great transformations never happen in one fell swoop, Collins concludes. “Once you fully grasp how to create flywheel momentum… and apply that understanding with creativity and discipline, you get the power of strategic compounding.”88 Once you have correctly found your flywheel, you keep pushing on for years and decades, with decision after decision, action after action, and turn after turn, so that each turn adds to the cumulative effect and you end up with amazing compounding power. That is exactly what Amazon does. 10.6

Keep the Reckless Spirit of a Startup

A bureaucratic business is hardly going to produce a flywheel effect. Bezos has been committed to building his organization as anti-bureaucratic from the beginning. To guard the trend of organizational expansion, he has

88 Jim Collins. Turning the Flywheel – Strategic Compounding. https://www.facebook. com/watch/?v=377179599532739. 2019.

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implemented the principle known as “two-pizza teams.”89 Like Bezos’ other management innovations, this may sound like a trick of sorts, but senior engineers and economists with PhDs do build their professional teams according to this organizational principle. Ideally, according to this principle, each of Amazon’s teams should be small enough that it can be fed with two pizzas. Amazon uses video games to motivate employees in its warehouse management. These games track throughput and pit employees against each other, pushing them to move faster.90 “Two-pizza teams” represents a more subtle white-collar version of this gamification. Small teams can instill a sense of ownership in a project. However, employees working in such small teams are also more likely to suffer from the fear of failure because there is no larger place to hide and no greater distraction from blame and criticism. Amazon builds a number of programs to guide its different teams. Bezos insists that plans be pitched in six-page memos, written in full sentences, a form he describes as “narrative.” This practice emerged from a sense that PowerPoint had become a tool for disguising fuzzy thinking. Writing, Bezos surmised, demands a more linear type of reasoning. As John Rossman, an alumnus of the company who wrote a book called Think Like Amazon, described it, “If you cannot write it out, then you’re not ready to defend it.” The six-pagers are consumed at the beginning of meetings in what Bezos has called a “study hall” atmosphere. This ensures that the audience isn’t faking its way through the meeting either. Only after the silent digestion of the memo—which can be an anxietyinducing stretch for its authors—can the group ask questions about the document.91 Most teams at Amazon are hermetic entities; required expertise is embedded in each group. Take Amazon’s robust collection of economists

89 Alex Hern. The Two-Pizza Rule and the Secret of Amazon’s Success. The Guardian. https://www.theguardian.com/technology/2018/apr/24/the-two-pizza-ruleand-the-secret-of-amazons-success. Apr. 24, 2018. 90 Greg Bensinger. “Mission racer”: How Amazon Turned the Tedium of Warehouse Work into A Game. The Washington Post. https://www.washington-post.com/tec hnology/2019/05/21/missionracer-how-amazon-turned-tedium-warehouse-work-intogame/. May. 21, 2019. 91 Franklin Foer. Jeff Bezos’s Master Plan. The Atlantic. https://www.the-atlantic.com/ magazine/archive/2019/11/what-jeff-bezos-wants/598363/. Nov. 2019.

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with doctorates. In the past several years, the company has hired more than 150 of them, which makes Amazon a far larger employer of economists than any university in the country. And while other companies have tended to keep them in centralized units, often working on forecasting or policy issues, Amazon takes a different approach. It distributes economists across a range of teams, where they can, among other things, run controlled experiments that permit scientific, and therefore effective, manipulation of consumer behavior. Relentless might be the most Amazonian word, but Bezos also talks about the virtues of wandering. “Wandering is an essential counterbalance to efficiency,” he wrote in a letter to shareholders this year.92 Many Amazon employees appreciate most about their employer was the sense of intellectual autonomy it allowed. Once they had clearly articulated a mission in an approved six-pager, they typically had wide latitude to make it happen, without having to fight through multiple layers of approval. The wandering mentality has also helped Amazon continually expand into adjacent businesses—or businesses that seem, at first, unrelated. Assisted by the ever growing consumer and supplier data it collects, and the insights into human needs and human behavior it is constantly uncovering, the company keeps finding new opportunities for growth. The Amazon flywheel also cannot run without technology. Its perpetual flow of real-time, ultradetailed metrics allows the company to measure nearly everything its customers do: what they put in their shopping carts, but do not buy; and what kind of recommendations they will receive based on previous purchases and so on. It can also tell when engineers are not building pages that load quickly enough, or when a vendor manager does not have enough gardening gloves in stock. Data creates a lot of clarity around decision making. Data is incredibly liberating. Amazon employees are held accountable for a staggering array of metrics, a process that unfolds in what can be anxiety-provoking sessions called business reviews, held weekly or monthly among various teams. A day or two before the meetings, employees receive printouts, sometimes up to 50 or 60 pages long, several workers said. At the reviews, employees are cold-called and pop-quizzed on any detailed results. Explanations like “we’re not totally sure” or “I’ll get back to you” are not acceptable, many 92 Jessica Stillman. Jeff Bezos’ Latest Shareholder Letter Makes the Case Against Too Much Efficiency. Inc. https://www.inc.com/jessica-stillman/jeff-bezos-latest-shareholderletter-makes-case-against-too-much-efficiency.html. Apr. 12, 2019.

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employees said. Some managers sometimes dismissed such responses as “stupid” or told workers to “just stop it.” The sessions crowd out other work, many workers complain. But they also say that is part of the point: the meetings force them to absorb the metrics of their business, their minds swimming with details.93 Employees talk of feeling how their work is never done or good enough. One Amazon building complex is named Day 1, a reminder from Mr. Bezos that it is only the beginning of a new era of commerce, with much more to accomplish. Bezos was so concerned about the kind of bureaucracy that weakens businesses over time that he organized his ideas about the workplace into a set of concepts (a good portion of which were counterintuitive) that were simple enough to be articulated in a way that was easy for new employees to understand, yet broad enough to apply to an almost unlimited number of business areas, and rigorous enough to avoid the mediocrity he feared. The result was the 14 Amazon Leadership Principles, the articles of faith that describe the way Amazonians should act. In contrast to companies where declarations about their philosophy amount to vague platitudes, Amazon has rules that are part of its daily language and rituals, used in hiring, cited at meetings, and quoted in food-truck lines at lunchtime. Some Amazonians say they teach them to their children. As the company’s website indicates, “We use our Leadership Principles every day, whether we’re discussing ideas for new projects or deciding on the best approach to solving a problem. It is just one of the things that makes Amazon peculiar.”94 These principles are reminiscent of an empire of the elite. (Principle 6: Hire and Develop the Best - Leaders raise the performance bar with every hire and promotion. They recognize exceptional talent and willingly move them throughout the organization. Leaders develop leaders and take seriously their role in coaching others. We work on behalf of our people to invent mechanisms for development like Career Choice.) These elites hold high expectations of each other and break free from the bureaucratic red tape and office politics that keep them from being the best they can be. Employees demonstrate “ownership”. (Principle 2: Ownership - Leaders 93 Jodi Kantor, David Streitfeld. Inside Amazon: Wrestling Big Ideas in a Bruising Workplace. The New York Times. https://www.nytimes.com/2015/08/16/technology/ inside-amazon-wrestling-big-ideas-in-a-bruising-workplace.html. Aug. 15, 2015. 94 https://www.amazon.jobs/zh/principles.

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are owners. They think long term and do not sacrifice long-term value for short-term results. They act on behalf of the entire company, beyond just their own team. They never say “that is not my job.”) They learn with great curiosity (Principle 5: Learn and Be Curious: Leaders never done learning and always seek to improve themselves. They are curious about new possibilities and act to explore them). They “Dive Deep” (Principle 12): Leaders operate at all levels, stay connected to the details, audit frequently, and are skeptical when metrics and anecdote differ. The workplace should be transparent and precise everywhere to know who has really achieved and who has not. Within Amazon, the ideal employee is often described as: adhering to high, almost exacting standards (Principle 7); showing a bias for action (Principle 9); thinking big (Principle 8); despite setbacks, rising to the occasion and never settle (Principle 12); daring to respectfully challenge decisions when they disagree, and once a decision is determined, committing wholly (Principle 11). What is the first of these 14 Amazon Leadership Principles? There is no doubt about it: Customer Obsession. “Leaders start with the customer and work backwards. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers.” Twenty-five years after its founding, Amazon does not seem to have caught the complacency of a large company. It still sees itself as a reckless startup that must earn every bit of profit on its deals and sees every negotiation as a matter of life and death. To this day, typing the Relentless.com URL into a browser will take you directly to Amazon. The word “Relentless” also has a “no mercy” connotation and appears several times in Bezos’ annual open letter to shareholders. Indeed, Amazon is relentless in every way. It is tough on competitors and suppliers alike. Like Walmart, Amazon is convinced that growing margins depend on constantly getting better deals from suppliers. But what is even scarier than Walmart is that Amazon extends its hand further. Amazon has also never been afraid to compete on the downside. In downward competition, it can sink into the lows that most other companies are afraid to reach and in doing so, finish off its competitors. Within the company, Amazon’s performance pressures and employee demands far exceed those of other companies, creating a Darwinian environment of intense internal competition that believes more in small teams than bureaucratic control.

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However, Amazon’s fundamental success may lie in its dedication to its customers while being unforgiving to employees, competitors, and suppliers alike. It sees pleasing its users as its highest pursuit. It does not operate like other companies, bound by various traditions (including those of Wall Street). It identifies the organization’s mission as one of exploration and invention, which gives Amazonians the ability to come up with new things. It is foreseeable that 10 years from now, the business that Amazon is in could change even more as it follows the needs of its customers. Perhaps Amazon’s 25-year journey can be summed up thoroughly in an inspirational book title by Tim S. Grover - From Good to Great to Unstoppable (2013).

11

Sony: A Counterexample to Apple

In a world where software is becoming more and more dominant, Sony is a hardware company. It needs to transform itself from a device maker to a platform builder.

The first annual meeting at Sony attended by Andy Lack, the head of Sony music, was in April 2003, the same week that Apple launched the iTunes Store. Lack was in charge of the music division and was engaged in laborious negotiations with Apple, the dark horse that had suddenly emerged in the music field. In fact, he arrived in Tokyo directly from Cupertino, carrying the latest version of the iPod and a description of the iTunes Store. In front of the two hundred managers gathered, he pulled the iPod out of his pocket. “Here it is,” he said as CEO Nobuyuki Idei and Sony’s North America head Howard Stringer looked on. “Here’s the Walkman killer.”95 This was the moment that turned the world upside down. From then on, Sony began its dim fall as the brightest star in the consumer electronics industry. 11.1

Walkman Versus iPod

Sony has failed as much as Apple has succeeded. 95 Walter Isaacson. Steve Jobs. Simon & Shuster. 2011. 407.

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It was a consumer electronics giant with a reputation for design, founded by a perfectionist leader known for his detail management. Is the company I just described Apple? Sure, but this could also be used to describe Sony. In fact, like Polaroid founder Edwin Land, one of Jobs’ main role models in business was Sony co-founder Akio Morita. Jobs was also a great admirer of Sony’s unique style and memorable product design in the early days of Apple’s product development. So why did Apple rank as one of the world’s largest companies in terms of market capitalization in 2019, with a net profit of $55.3 billion for the year,96 while Sony has been losing money for so long that it has a market capitalization of just over $70 billion as Apple climbs to $1 trillion?97 Let us look at a key point in Apple’s race with Sony. In 2001, Apple released the iPod. This was a time of great change in the music field. The position of Sony Walkman and CD players, which had dominated the music market for more than 20 years, began to be shaken, and more and more people tried enjoying digital music, and downloading music in MP3 format subsequently became one of the most important ways. Previously, Sony had a strong record of innovation. Its history is marked by important technical achievements. In 1955, the TR-55 transistor radio became the first popular product to be marketed under the Sony brand. In 1968, Sony developed the Trinitron display technology. By 2008, Sony had sold 280 million Trinitron color TVs and computer monitors using this technology until it was replaced by LCD and plasma technologies. In 1975, Sony developed the Betamax video tape. In 1979, the Walkman was introduced, creating a personal music playback market (many years before Apple’s attempt). In 1980, Sony developed the 3.5-inch floppy disc.98

96 Apple’s Net Income in the Company’s Fiscal Years from 2005 to 2019. Statisca.

https://www.statista.com/statistics/267728/apples-net-income-since2005/. 2019.

Nov.5,

97 Kana Inagaki, Lionel Barber. Sony Chief Vows Recovery Is No False Dawn. Financial Times. https://www.ft.com/content/e6bb5286-c88b-11e8-ba8f-ee390057b8c9. Oct. 8, 2018. 98 1 inch ≈ 2.54 cm.

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In 1982, the compact disc (CD), jointly developed by Sony and Philips, was introduced, pioneering digital audio technology. In 1985, the Handycam portable video camera was introduced. In 1994, the PlayStation home game console was launched. In 1996, the Vaio computer was launched. In 1997, the Cybershot digital camera was introduced. In 1998, removable flash memory cards were introduced. In 2005, Bravia, a new generation of flat-panel LCD TVs, was introduced. In 2006, the Alpha interchangeable lens digital camera was introduced. Most people have owned something made by Sony at some point. None shines brighter than the Walkman. Sony is known to have changed the way people listen to and consume music. The Walkman made it possible for people to carry around a music player and listen to it through lightweight headphones. Before the Walkman was introduced, music could only be enjoyed with the help of a home stereo system or a car stereo system. However, portable recorders have been around for decades, so from a technical point of view, the Walkman device is not that advanced. It was improved by eliminating the recording function and speakers of the traditional cassette recorder and instead equipped with stereo circuits and stereo headphone terminals. It was aimed at the general young consumer market and soon became a cultural icon and social phenomenon. Thus, for nearly a quarter of century, the Sony Walkman was the undisputed market leader, until 2001, when Apple decided to launch the iPod, a new portable player. About 80% of the iPod technical components (e.g., memory, storage media) were produced by various companies within the Sony group. In 2004, iPod sales overtake Sony Walkman globally and become the new market leader in portable players.99 How was this big reversal possible? At that time, Sony was a much larger company than Apple, with its electronics division alone being larger than Apple’s entire company. As of December 31, 2004, Sony’s electronics division has 14.6 billion dollars in sales and operating revenue. For the same quarter, Apple Computer Inc.

99 Camellia Cojocaru, Silviu Cojocaru. Sony vs. Apple - iPod Launching, a Case Study of Leadership and Innovation. Manager Journal, 2014, 20 (1): 115–125.

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reported the highest quarterly revenue in 9 years as strong sales of Macintosh laptops and iPod music players allowed the company to generate $2.35 billion in revenue.100 Sony certainly has more financial resources, the necessary engineering know-how and sufficient production capacity to develop and produce similar products that can compete with the iPod. Sony has developed numerous manufacturing technologies and patents in various fields. Sony also owns a quarter of the world’s music rights and is able to charge less for online music than Apple, and the Sony Connect Online Music Store should be comparable to Apple’s iTunes Music Store. In theory, Sony could have met all the requirements to launch a new generation of portable players; however, it was not it but Apple that completely changed the market. Clearly, Apple has done many things right. The iPod’s success lay in the simplicity of the product, the avantgarde marketing, the iTunes integration, and the reliance on its loyal Macintosh users. Apple also succeeded in convincing record companies (including Sony) to sell licensed music for $0.99 per song. The end-toend integrated system in the iPod—from computer to firewire, device, software, and content management—makes the Sony Walkman compete with the iPod far beyond a simple hardware battle. It can be inferred that Sony must be doing many things wrong. Sony’s traditional strategy has been to offer high-quality, feature-rich products at a premium price. However, Sony deviated from this strategy in the portable digital music player market, as it offered products with few of the many features of the iPod. This was due to Sony’s initial reluctance to enter this market at all. Since Sony itself has a large media division, it inherently rejects products that might encourage music and movie piracy. Sony released a portable digital music player that did not support MP3 play and required that songs be converted to ATRAC format first. This was one of its biggest failures, namely sticking to its own proprietary format and completely failing to see that after 2000, digital music was all about file sharing and thus all of it was in MP3 format. Sony’s internal disarray also exacerbated the debacle of its player products, with its Vaio personal computer division launching competing products that led to even greater music player woes.

100 Sony vs. Apple in Portable Music. https://www.mcafee.cc/Classes/BEM106/Pap ers/2005/Sonymusic.pdf.

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Perhaps more critical was the industry’s paradigm shift—the beginning of a shift from hardware to software for a better user experience. For example, even if Sony makes the next smaller, lighter version of its famous Walkman series with MP3 support, it will not help. The first iPod was not only a digital music player, but a new experience in hardware, software, community, and social identity. Sony failed to realize this fact in time and was therefore slow to capitalize on this opportunity. The “iPod + iTunes” model shows that Apple’s goal from the beginning was not only to become a music player manufacturer, but also to create a content distribution platform. After waking up, Sony Connect wanted to create a similar platform, but to make it the dominant platform, Sony needed to bring in competing content providers to its own platform. In other words, to make the platform successful, Sony could not put its own content above that of its competitors: what is the point of having the platform in that case? In just three years, Sony discontinued the Connect online store, and since then, it has been unable to offer a comprehensive alternative in the face of iTunes. 11.2

Lost in the Digital Age

Rome was not built in a day, and its downfall was not instantaneous. The example of Walkman losing out to the iPod shows a series of problems with Sony’s management over the years that eventually led to its loss of innovation. Too much focus on the device at the expense of the experience From the early 1980s and into the 1990s, Sony excelled. It was the unrivaled master of consumer electronics, synonymous with cutting-edge technology, precision craftsmanship, and consumer satisfaction. There was a collective enthusiasm for an exciting and humane future, and Sony’s ultra-functional, slightly discerning electronic gadgets were the clearest expression of that enthusiasm. These gadgets did not just include the Walkman and Trinitron. In fact, all of Sony’s products were made with unmatched quality and a passion for maintaining exhaustive features that consumers could be proud to own.

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These characteristics can still be found in Sony products today; however, everything else has changed dramatically. Sony is still able to produce beautiful products, but fewer and fewer people are excited about them. More than one critic has pointed out that Sony’s current product line is crowded and confusing, but providing customers with a variety of choices is precisely the basis of Sony’s past success. Why is it that a strategy that once served Sony so well is now not only failing, but failing so badly? Part of the reason for the change is technological. Apple’s iPhone products are quite limited in terms of models and colors, but they are extremely customizable. Since a great deal of the experience comes from the software rather than the hardware, consumers are not using a product that was designed for them, but one designed by themselves. This single product feature is so powerful that the original single moment of instant gratification (like buying a perfect camera, TV or phone) is replaced by dozens of the similar moments. Each time an application is installed or content downloaded, the user receives the same emotionally customized experience as if they had purchased a single product. This explains more thoroughly why Sony products are no longer “cool”: today’s consumers care more about such emotional experience, but Sony is still focused on the product. It is trapped by its past success. In the early 1980s, getting technology into the hands of customers in a usable way posed the biggest challenge, and Sony was ahead of the curve more than any other company. It had an amazing ability to leapfrog the next technological hurdle: producing brighter TVs, smaller tape decks, integrated portable camcorders. It gracefully crossed the barriers to achieving these goals before its competitors had even tried. In a productoriented industrial economy, this was enough. Every year, new products offered new features. As long as a particular product could do something newer, people did not seem to care about the experience of using it, even if they had to go through a 70-page manual to do so. While in today’s experience economy, the user’s expectations are reversed. The technology is all given, and the question of “what are the specifications” is replaced by “how does it feel to use?” Sony’s expertise in creating the next high-tech product has been captured by Samsung, LG, and increasingly sophisticated Chinese manufacturers. Without changing its business model, Sony has been left behind by a world that has changed its relationship with technology.

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Sadly, Sony still has all the resources it needs to execute well on a new strategy. Its engineering capabilities are impeccable, its research and development resources are extensive, and it has a vast array of highquality media devices. The success of PlayStation demonstrates its ability to deliver great experiences through an integrated product and content ecosystem; however, the PlayStation 4, which has been out for 5 years, is now at the end of its product lifecycle. Overall, Sony in the last 20 years has been extremely weak in creating trend-setting products. Missing from Sony’s strategic vision is an emphasis on delivering powerful, resonant user experiences. CEO Kazuo Hirai, who stepped down in 2018, acknowledged the company’s need for change, but the goals he set remained focused on hardware. Users still do not figure into the Sony equation. In contrast, Apple’s hardware is simply a tool for providing other creations, such as user interfaces, applications, and services. Together, these components form a rich platform experience that allows users to keep their many devices up to date and in sync. The platform world has taught us one thing: it is not the devices, or even the connected devices, that matter, it is the connected experience. Sony has built better game consoles, better camcorders, and more advanced televisions (including the first smart TVs) that are far ahead of the market. Could not these have ensured the company’s success? They could, maybe in the 1990s, but certainly not today. Building better devices—or even better connected devices—yielded far less benefit than building the digital experiences associated with Sony devices. Sony must move beyond an understanding of devices: success not just by focusing on engineering and investing in each of its existing lines of business to be best in class, but also by doing more to transform those devices into some sort of platform on which consumers can build their lives; on which digital partners can also create and deliver new value. So for Sony to turn things around and become relevant in consumers’ lives again, it has to get rid of its old self-perception. It must stop acting like a device manufacturer and think like an experience creator, that is, create platforms for consumer engagement that freely unleash consumer choices rather than constraining them.

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Performanceism eliminates the “technical Sony” In the late 1980s, Sony executives, particularly Norio Ohga, the company’s president and chairman of Sony America, intended to introduce entertainment content to Sony’s business. In 1988, Sony acquired CBS Records Group from CBS, giving it the world’s largest record label. The following year, it acquired Columbia Pictures Entertainment, the largest acquisition of an American company by a Japanese company at the time, sparking a controversy in the United States. Movies had always been a source of pride for Americans, and the Japanese company’s involvement provoked public panic. The American public did not see Sony’s acquisition simply as a business transaction, but as an expression of Japan’s quest for economic supremacy. Such perceptions were exacerbated by the publication of Akio Morita’s 1989 book The Japan that Can Say No, co-written with nationalist Shintaro Ishihara. The two men claimed that Japan was a stronger and better country than its postwar allies and that it could stop depending on the United States and become more autonomous in all areas, including economics and diplomacy. Sony’s acquisition spree in the United States, along with other Japanese companies, has strongly stimulated all walks of life in the United States. Sony renamed the two acquired companies “Sony Music Entertainment” and “Sony Pictures Entertainment,” respectively. The $7 billion acquisition was expected to create vertical integration between hardware and software, but the company had to pay considerable financial and time costs due to the resistance it provoked. In order to quell external controversy, Akio Morita, Norio Ohga, and other company leaders had to focus mainly on the United States and could not focus on technology development as in the past, the “technical Sony” has gradually faded. In retrospect, Sony’s successive leaders were responsible for this decline. The company’s founder, Akio Morita, boldly expanded the “empire” from hardware to software, content, cell phones, and finance and insurance, and Sony began to form a bloated system that was “too big to fail,” while its face beginning to blur: it was originally a consumer electronics company, but after diversification, what kind of company has it become? What was holding such a huge machine? It became increasingly worn and slow, and the once innovative company was reduced to a follower rather than a leader.

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It was an extremely long and painful process. Sony had long been seen to outsiders as a tale of two men: Masaru Ibuka and Akio Morita. “It is the joining of these two geniuses that has made Sony what it is today. It is not an overstatement to say that without either one of them, Sony would not be where it is today.” This is what Norio Ohga, then chairman of Sony, wrote in 1999 in the foreword to the book The Genryu of Sony.101 Good point, but he forgot to mention himself. In fact, the story of Sony is a story of three men—just as Ibuka and Morita, one focused on technology and the other on marketing, became the perfect example of founder cooperation, so after Ibuka, Morita, and Ohga, paired together, were hailed as a golden combination: while Morita was leading Sony’s business direction overseas as a charismatic leader, Ohga was ensuring a steady flow of innovative Sony products at home as a hands-on manager. It is for this reason that Ohga’s retirement in 2002 is generally seen as the end of a period dominated by Sony’s founder. During his reign, Ohga presided over the acquisition of CBS Films for a whopping $3.4 billion, a move that was widely considered ill-advised and overpriced. Ohga endured all the criticism until 1996, when the new CBS management completed a beautiful turnaround and Ohga’s strategy to turn Sony into a two-wheeled hardware and software-driven giant was seen as prescient. Ohga’s lasting impact on Sony was to transform it from a music and video device producer to a global media giant capable of delivering its own content in a machine of its own making, thus transforming Sony’s brand DNA, a transformation made possible through huge acquisitions and the promotion of superstars (a number of superstars, including Herbert von Karajan and Michael Jackson, have been spokespersons for Sony). This transformed Sony from a Japanese company that started on the ruins of World War II to a true multinational. For the first time, Ohga appointed an American as a director of Sony, paving the way for Howard Stringer to become the first non-Japanese chairman. But Ohga’s largesse also saddled Sony with interest-bearing debts of up to 2 trillion yen, nearly half of its turnover. His chosen successor, Nobuyuki Idei, took office once believing that the probability of Sony’s survival was less than 50% and that it was imperative to improve the company’s financial structure and find a balance between repayment and investment. As Sony’s first non-entrepreneur, non-technical leader, Idei 101 Sony Corporation Media Center. The Genryu of Sony. Beijing: Huaxia Publishing House. 1999.

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reduced the voice of engineers in the company and abandoned some technologies that would later be seen as extremely important, such as battery technology and robotics. Relying on strict performance and financial evaluations, Sony’s shortterm profits and stock price increased during the first half of Idei’s tenure as Sony’s president. However, the company was unable to find new growth points and soon fell into a prolonged slump, and in 2003 even caused the Nikkei high-tech stocks to dive due to huge losses, known as the Sony Shock. Idei left in disgrace, and his successor, the American Stringer, followed his course. Idei believed that with the advent of the Internet era, consumer electronics alone was no longer enough to lead the way. Sony needed to completely transform itself from an electronics company to an entertainment company. After two terms of leadership by Idei and Stringer, the road of the “technical Sony” was completely abandoned. The “engineer spirit” that Sony was proud of was gone, and a large number of R&D talents were lost. Nicknamed the “cost-cutter,” Stringer imported a purely American corporate management model into Sony’s global system, focusing on personnel and financial performance issues such as cost-cutting and sales revenue, while ignoring new products, technologies, and consumer experience. This led to a series of serious consequences. First, performanceism completely destroyed Sony’s workplace atmosphere. Sony’s founding statement once read, “establish an ideal factory that stresses a spirit of freedom and open mindedness, through technology.” For a long time, Sony was a company that led change, with people who knew the technology well concentrating on technology development under the stern eye of top managers. Many engineers dared to rebel and did not blindly follow the orders of their superiors, and even developed things they wanted quietly without their supervisors’ knowledge [Kozo Ohsone, the “father of the Walkman,” developed the Walkman without his supervisor Norio Ohga’s knowledge]. Compared to other Japanese electronics manufacturers, Sony is always looking into the future to find answers, and that is its essence. Even if it is ridiculed as an experimental guinea pig for large electronics manufacturers, it still persists in challenging new technologies and strives to develop products that are refreshing to consumers. It does not develop and sell products only when there is a market, but develops products that

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can create a market when the market has not yet been formed. That is how it grew up. But under the baton of performanceism, great products lose their room for trial and error, and everyone is afraid of failure. The management was so domineering that it was surrounded by obsequious clerks and thirdrate engineers who had no backbone. Kozo Ohsone described that under the pressure of performanceism, Sony’s executives and newcomers “were bending over backwards to work” and “the slogan of creating fun and the attitude of valuing relaxation had disappeared. Focus on the numbers is important, but when results-based and outcome-based management goes too far, people lose the initiative to think freely. … It is certain that new things will not appear.”102 Toshitada Doi, who was in charge of the development of the robot dog AIBO and the robot QRIO, published the article Performance Doctrine Destroyed Sony under his pseudonym, full of sorrow and regret. He felt that Sony’s performanceism, which had been in place since 1995, was completely contrary to the spirit of its founder, Masaru Ibuka. Gone is the passionate team that focused on R&D and innovation, and in its place is the “external motivation” that makes everyone think about how to get high pay all day long. “Today’s Sony employees seem to have no spontaneous motivation. Why? I think it is because of performanceism. Performanceism means that business results are directly linked to monetary compensation, and that employees have to work hard to get paid more. If extrinsic motivation is enhanced, then spontaneous motivation is suppressed.”103 According to Toshitada Doi, this is contrary to the philosophy of “work is reward” advocated by Masaru Ibuka. The biggest reason for Sony’s waning, in Doi’s analysis, is because in the late 1990s, Sony gratefully ingested the American rational business model and gradually abandoned its strength, the Flow Management model. Leo Esaki, who worked at Sony and later won the Nobel Prize

102 Seiji Munakata. Management’s Bossiness Causes Sony to Lose Popularity: An Interview with Kozo Ohsone. Nikkei BP. https://www.evolife.cn/html/2016/88458. html. 103 Sony’s Former Managing Director, Toshitada Doi: Performance Doctrine Destroyed Sony. Tencent Technology. https://tech.qq.com/a/20120614/000196.htm. June. 14, 2012. The original article was published in the January 2007 issue of the Japanese journal Bungeishunju.

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in Physics, once said, “Sony is chaotic and orderly.” According to Doi, chaos and order can bring energy to the workplace, which is the state of Flow Management. Since its founding, Sony has maintained this chaotic and orderly Flow Management model. In this way, the company does not rely on money and status to attract talents, but rather to give them a sense of satisfaction in the process of work, which is the greatest intention of “Flow Management.“ The resultoriented approach is to attract people to act with money and status, and that is the way to value the “extrinsic motivation.” In the United States, high salaries and generous benefits will attract employees, but in Japan, they may not do so completely. Compensation is important, but it is also important that the work is meaningful and the company is worthwhile. That idea of fighting for something is not something that only money can get you.104 The Flow Management that made Sony robust and boosted morale from within was destroyed by resultism. The soul of Sony, such as “to establish an ideal factory that stresses a spirit of freedom and open mindedness” and “to do what no one else has done,” has disappeared without a trace. Sony, with its entrepreneurial spirit depleted and KPIs dominate everything, has lost the drive for self-innovation and fallen into the “curse of success.” Second, performanceism is also the biggest enemy of innovation. The original Sony dared to challenge areas that other companies would not venture into, and had the temperament and endurance that must make it practical. For example, the image sensing business, which is currently contributing a lot to Sony, was nurtured by Kazuo Iwama, the fourth president of Sony. At the beginning, this business was not only not profitable at all, but also required ten years of continuous investment, which, as Iwama said, “would not bring in revenue until I was gone.“105 No one would have invested in this way if they lacked a vision of the future. Tamotsu Iba, Sony’s first chief financial officer, bluntly criticized Sony’s leaders as “non-technical operators” who placed too much emphasis on numerical improvements and always pursued efficiency in the technology development, inevitably falling into a state of being eager for quick success 104 Seiji Munakata. So Sony Gave Up Developing Robots: An Interview with Toshitaka Doi. Nikkei BP. https://www.evolife.cn/html/2016/88709.html. 105 Seiji Munakata. So I Submitted My Proposal to Sony: An Interview with Tamotsu Iba. Nikkei BP. https://www.evolife.cn/html/2016/88292_2.html.

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and instant benefits. “Of course, it is necessary to set a certain time limit. But the development of a competitive and exclusive technology requires a certain amount of time. A successful manager must have the judgment to ‘believe that no matter how much money and time is spent, one day it will bear fruit, and continue to do so with strong conviction.’ However, Sony does not have people with that kind of judgment at the moment.”106 Kozo Ohsone also said, “After a company or an organization became bigger, there were more people seeking ‘peace.’ Unusual new ideas are dismissed by people who are good at managing. They will only care about ‘what the earnings yield is’ from the start, and the idea of developing something interesting will basically be reduced to nothing, no matter how much upfront investment and time is put into it.”107 Once the company invested in innovation, short-sighted investment funds and other stockholders always asked “when and how to make a return,” while management leaders who did not understand technology used “selection and concentration” as an excuse to abandon technologies that would not yield short-term returns within three years. At the same time, Sony also stopped sowing seeds for the medium and long term, and stopped stockpiling technologies that were necessary for the future. A silo culture that depletes the energy to move forward The third major problem dragging down Sony is the accumulation of internal friction. Publicly and privately, Sony’s top executives have a deep understanding of many of the fundamental challenges facing the company: the need for different divisions to work better together to deliver a more unified user experience and to innovate. However, Sony’s recent leaders have found it difficult to exercise power at the sprawling company. After the retirement of Sony’s legendary founding generation, Sony became embroiled in endless bickering between factions, depleting the precious energy needed to move forward.

106 Seiji Munakata. So I Submitted My Proposal to Sony: An Interview with Tamotsu Iba. Nikkei BP. https://www.evolife.cn/html/2016/88292_2.html. 107 Seiji Munakata. Management’s Bossiness Causes Sony to Lose Popularity: An Interview with Kozo Ohsone. Nikkei BP. https://www.evolife.cn/html/2016/88458. html.

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Idei proposed a “second venture” and developed a “Transformation 60” restructuring plan to breathe new life into the company in time for Sony’s 60th anniversary in 2006, but this restructuring effort was largely ineffective. Stringer came on board with the slogan “Sony United” in an attempt to bring the historically intricate divisions together as one, but to little avail. In his first press conference as CEO, he declared that he would “accelerate cross-divisional collaboration to revitalize Sony and foster creativity.” However, in 2006, he was confident that he would transform Sony, but by 2013 he had completely abandoned the idea. The biggest challenge for Stringer’s successor, Kazuo Hirai, was still to break the closed state of departmental infighting. He proposed the “One Sony” strategy for this purpose, calling for unity across divisions and trying to reorganize many subsidiaries into a more cohesive whole. However, the inertia of an old company is too strong to be overcome by one or two generations of leaders. Kenichiro Yoshida, Sony’s current CEO, admits, “It is going to take time to change the culture of this company. But we need to change to become flatter, speedier and more collaborative.”108 Stringer once bemoaned, “Sony is a company with too many silos!”109 This is reflected first and foremost in the fact that Sony makes too many product models, but for any of them, the maker cannot say, “This product contains our best, cutting-edge technology.” While Apple focuses on a few devices at a time, Sony is vying for several product lines. Sony’s product portfolio and its categories are too diverse, filled with various sub-brands. The tendency of cutthroat competition is also evident from product naming: Bravia TVs, Vaio laptops, Cybershot digital cameras, and Xperia cell phones… Not only that, but the product lines are very crowded: some accommodate 10 different portable cameras, some launch nearly 30 different TVs… All of these cause confusion for consumers, and these product lines overlap and even cannibalize each other. Too many electronics and a fragmented focus meant that Sony forced customers to choose its sub-brands rather than Sony itself. This is 108 Kana Inagaki, Lionel Barber. Sony Chief Vows Recovery Is No False Dawn. Financial Times. https://www.ft.com/content/e6bb5286-c88b-11e8-ba8f-ee390057b8c9. Oct. 8, 2018. 109 Gillian Tett. The Silo Effect: The Peril of Expertise and the Promise of Breaking Down Barriers. Simon and Schuster. 2015. 68.

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completely different from Apple—which also has sub-brands, but it is all Apple that consumers buy. These products are: Apple iPhone, Apple iPad, Apple Macbook, Apple iTunes, and Apple iPod. Almost every one of these Apple products can be noted for sharing a common design language. In contrast, it seems that almost all of Sony’s products could have come from a separate company. And in a sense they do—whether it is a TV, a speaker, a phone, a camera, or something else in a catalog, it seems to have been crafted by a diasporic engineer oblivious of the outside world. There is no teamwork, no uniformity, and certainly no complete consumer experience. Worse still is the internal conflict in product development. Why is it that Sony, which clearly has powerful screen, battery, and camera system technologies, makes phones that are simply not competitive in the market? This is because all Sony divisions are led by performanceism, which suppresses the ability to collaborate. For example, the imaging division refuses to share camera technology to the cell phone division because it is worried that having the same photo experience for cell phones will affect the sales performance of its own division. Competitive divisions are jealous of each other’s budgets, and communication barriers abound, making innovation difficult. The commercialization of the CD, the outstanding product of the Ohga era, was the result of the cooperation of the various divisions of Sony. Ohga later said, “There is no previous example of putting the full power of Sony Group to good use like the CD.”110 Unfortunately, there is no subsequent example either. The key is that his strategy of driving Sony on two wheels, hardware and software, would not have been possible without the synergy created by full cooperation. Sony has strength in individual products, but unless it builds an ecosystem with a strong user base, it will never reach the high level of Apple: hardware, software, and peripherals are perfectly integrated to create a great experience, so that the success of one product can promote the sales of all related products. If Sony’s troubles are more lamentable than those of other Japanese technology companies, it is because it had the best chance of accomplishing Apple’s feat—turning to network hardware and digital development. Its electronics division could have made first-class devices such 110 The Birth of the CD. Sony China. https://www.sony.com.cn/aboutsony/1214.

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as music players, game consoles, cell phones, and computers, while its entertainment division—movie studios and music companies—had exclusive entertainment content. However, these divisions were too separate to work together, instead allowing Apple, a niche computer maker with no entertainment assets at all, to sweep the field. 11.3

To End the Uncertainty of Strategy

By comparing Sony and Apple, Steve Jobs’ biography summarizes two lessons about why Apple flourished and Sony declined. The first is that Sony’s “organizational fattening” (to borrow a phrase from Kouzo Osone) produced many symptoms—it was organized into divisions with their own bottom lines; the goal of achieving synergy in such companies by prodding the divisions to work together was usually elusive. Jobs did not organize Apple into semiautonomous divisions; he closely controlled all of his teams and pushed them to work as one cohesive and flexible company, with one profit-and-loss bottom line. Second, like many companies with multiple lines of business, Sony worried about cannibalization. If it built a music player and service that made it easy for people to share digital songs, that might hurt sales of its record division. One of Jobs’s business rules was to never be afraid of cannibalizing. “If you do not cannibalize yourself, someone else will,” he said. So even though an iPhone might cannibalize sales of an iPod, or an iPad might cannibalize sales of a laptop, that did not deter him.111 In addition to the above, perhaps the more crucial point is that at a time of urgent transformation, Sony had a strategic wobble about its future business model. One of the first things Stringer did after taking the helm of Sony was to invite Louis V. Gerstner to consult for Sony. Stringer repeatedly read Who Says Elephants Can’t Dance?: Inside IBM’s Historic Turnaround (2002) and told Gerstner, “I have scratched out the word I.B.M. and replaced it with the word Sony on almost every page of this book and its still reads well.” Gerstner’s diagnosis for Sony is that Sony’s fundamental problem frankly has nothing to do with margins in TV and the timing of a PlayStation 3. It has got everything to do with how Sony is going to compete

111 Walter Isaacson. Steve Jobs. Simon & Shuster. 2011.

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against other companies like Microsoft and Apple and others that are coming into its traditional space with a different set of skills and a different sense of how to approach the marketplace and the consumers.112 The story of Sony’s decline began with the company’s failure to adjust its business model in a timely manner, particularly in the way it created value. As technological innovation accelerates and the industry changes, the company should reassess its strategy or risk extinction. There is no shortage of similar examples, such as the classic Kodak failure story: Kodak developed the world’s first digital camera, but continued to see itself as a camera film company and eventually went bankrupt, while its competitor Fujifilm shifted to the imaging technology business and gained strong support in the medical imaging market. Sony’s success from the 1950s to the 1990s caused it to focus too much on the hardware business. At the beginning of the twenty-first century, while Sony remained focused on creating and selling hardware, consumer electronics were gradually becoming commoditized for a number of reasons. First was the entry of low-cost manufacturers originating in Korea and China, which were able to offer electronics at a lower cost. Second, information technology was revolutionizing hardware at an unprecedented rate and intensity. Products that once consisted only of mechanical and electronic components have evolved into complex systems that combine sensors, data storage, microprocessors, and software in a variety of ways. These smart, connected products opened up a new era of competition. In this context, Sony’s failure to reassess the way it created value has hampered its own ability to shift from hardware development to software development. Of course, it would be unfair to say that Sony was completely unprepared for the future. Morita and Ohga’s legacy for Sony was one of the hardware and software synergies—staying ahead of the curve in the consumer electronics industry and dominating the entertainment industry. The problem, however, was that Sony has not only failed to make content and technology complement each other in its dual role as content owner and device maker when engaging in a two-front war, but it has also proven counterproductive in practice.

112 Richard Siklos, Martin Fackler. Howard Stringer, Sony’s Road Warrior. The New York Times. https://www.nytimes.com/2006/05/28/business/yourmoney/28sony.html. May. 28, 2006.

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Generally speaking, consumer electronics manufacturers do not care much about how their customers access content. Content companies see things very differently, often expecting to lock down their content through digital rights management (DRM) technology in the hopes that it will prevent viewing by people who have not legally purchased it, even if that is less convenient for consumers. Sony’s problem is precisely that it is both a content company and a consumer electronics manufacturer. This has led it to lock in DRM in far more cases than its competitors, thus discouraging consumers. For example, its reluctance to allow music players to play tracks encoded in the popular MP3 format is due to the fact that MP3 files can be widely shared on the Internet, thereby condoning piracy. With that thought alone, Sony ceded dominance of the portable digital music player to Apple. Perhaps the Betamax was to blame for everything. In 1975, Sony introduced the first home cassette recorder and opened up a new market. But the Betamax eventually lost out to a rival VHS standard, in large part because VHS had the backing of the big Hollywood studios. Sony thus concluded that the best way to promote content adoption of its own technology was to enter the content business, since content owners have a major impact on the survival of technology standards. Since then, it has been working on a unique combination of consumer electronics and content. But the question is, is the resulting hybridization a “Frankenstein” or a new breed? Historically, Sony has generated far fewer synergies between its two businesses. Its hardware requires extensive support from content providers, but its own content interests inevitably lead it to a complex relationship with other content providers that is both competitive and collaborative. Apple’s development of iTunes into the leading music download service and establishment of the iPod as the dominant music player without owning a record label proves that a hardware company’s lack of a content business may instead be an advantage, as it makes Apple appear to be an equal in content negotiations. The gaming market is perhaps a special case. It is a relatively immature market with no universal standards, only competing proprietary formats. But Sony’s attempts to recreate the success of its games in music and movies have failed, and no one wants to buy a Sony device to listen exclusively to songs by Sony-owned artists or to watch movies produced by Sony.

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So, was Sony’s two-wheeled hardware and software-driven strategy wrong? Or could it still be a brilliant strategy, just poorly articulated and poorly executed by incompetent managers? Shigeo Maruyama, a Sony veteran and former president of Sony Music Entertainment and Sony Computer Entertainment, believes that Sony failed to understand what kind of company it was and could not extend and spread what it had. What Sony lost to Apple was not the technology, but the idea, the design, and the business model. Therefore, it should honestly admit that the era of Sony as a hardware company and technology company is over. Too many Japanese people have unrealistic illusions about Sony, they think Sony can still be the same as before, but Sony is not a technology company. For Sony to enter a new level of growth, it must first recognize the reality, escape from the ‘technology’ like a curse, and then be free to conceive in order to see the next road.

The so-called next road is to recognize that Sony is now a company that brings joy to users with software and products, with the entertainment business as the core, so the future is definitely not centered on the electronics-oriented route, but on the entertainment-oriented route. “The essence of Sony is a premium toy company.”113 This judgment by Maruyama may come as an extreme shock to a considerable number of Sony people. At CES 2019, Sony boss Kenichiro Yoshida repositioned Sony as a “creative entertainment company,” echoing Maruyama’s thoughts. From April 1, 2019, Sony officially merged its consumer electronics hardware divisions—the home entertainment and audio business, the video products and solutions business, and the mobile communications business, establishing the electronics and solutions business unit. At the same time, Yoshida said that Sony will not withdraw from the film and music business, but will give priority to these businesses, as his predecessor did not do. Considering that now is the perfect time to sell its entertainment business (because Warner and 20th Century Fox both just sold their business in a package), Yoshida’s statement could indicate that the company’s decision makers have finally figured out what the future of Sony is. This is a major shift. For a long 113 Seiji Munakata. The Essence of Sony Is a Premium Toy Company: An Interview with Shigeo Maruyama. Nikkei BP. https://www.evolife.cn/html/2016/88200.html.

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time, Sony has been seen as a consumer electronics giant, followed by a Hollywood entity. Yoshida said the three independently run entertainment businesses— music, games, and movies—have all been informed that it is time for a more coherent collaboration. He wants to make better use of PlayStationNetwork, a cloud gaming service, to bring Sony’s movies, TV shows, and music directly to consumers. While in the past, PlayStationNetwork managers have been reluctant to work with their movie and music counterparts, fearing a backlash from core gamers if Sony hitched a ride to market other entertainment products. This push from Yoshida could not be more timely: big data is now a major source of competitiveness, but the most tangible treasure trove of data Sony has is the 80 million monthly active users on PlayStationNetwork. And as a mid-sized Hollywood company, the biggest challenge facing Sony Pictures is the fact that other studios are moving into direct-to-consumer streaming services. “Entertainment is in Sony’s DNA,” claimed Yoshida. “We’ve now been in the music business for 50 years, the motion picture business for 30 years and the game business for over 25 years.“ For its last fiscal year, the three units made up 47 percent of Sony’s operating profit, which totaled $6.7 billion, the highest in the conglomerate’s history.114 Has the Sony genetic modification project, started by Morita and Ohga, come to fruition after such a long time? This is a matter of life and death; Sony is fighting for its survival. Putting down the burden of hardware and creating value for users through software and network-driven experiences may be the only proper path for this once-glorious company to prevent its own extinction. Apple’s successful cash flow depends on an ecosystem built on top of cutting-edge hardware. It pioneered the iTunes model that has spearheaded the development of companies like Amazon and Google. Sony must follow the same path and can build an integrated universal entertainment platform around PlayStationNetwork that distributes games, music, movies, and other content. The revenue streams generated by a loyal customer base are solidifying Sony’s profits. As a result, Sony’s focus should also shift to a subscription business that provides recurring revenue, rather than just selling better hardware. Sony needs to 114 Brooks Barnes. Sony’s Chief Plans to Make Entertainment Assets a Priority. The New York Times. https://www.nytimes.com/2019/01/06/business/media/sony-moviestelevision-ces-playstation.html. Jan. 6, 2019.

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find its place in the media and entertainment space, which has been revolutionized by Google, Apple, Facebook, Amazon, and Netflix. Of course, hardware taking a back seat is not the same as giving up completely. In this regard, Sony needs to return to its roots and re-root itself in the creation and refinement of elegant electronic devices, whether smartphones, game consoles, watches, or other wearable devices. Better yet, design something that people have never seen before—a new product that will surprise and delight the world. In other words, recapturing the magic of innovation that once changed the world. Through the efforts of the Hirai-Yoshida-led team, Sony has finally stopped the bleeding and resurrected itself. However, it is now standing on a new starting line, having just paved the way for the next 10 to 20 years to catch up with its competitors. Sony had seen the future: when Akio Morita decided to establish Japan’s first joint venture record company with CBS, the world’s largest record company at the time, in 1968, taking the first step into the music and entertainment industry, he positioned the “software” business together with the “hardware” business as Sony Group’s main business, believing that “hardware and software are the two wheels of Sony Group and must be made to run simultaneously.” Unfortunately, when such a future really came, the glory is no longer on Sony’s side. Sony’s worst mistake was that it failed to ride some of the biggest waves of technological innovation of recent decades—digitalization, the shift to software, and the Internet—to the point where “Is Sony broke today?” has become an old cliché in the tech world. After learning the hard way, can Sony recapture the glory of the Walkman era, revive innovation, and revitalize the brand? Only time will tell.

CHAPTER 3

No Pain No Gain: On Organization

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What Makes a Company Great?

Although Collins analyzed American companies, he hit the nail on the head of Chinese entrepreneurs. They have been walking cautiously for 40 years, with a huge question in their mind: Can the gap between “becoming bigger” and “becoming stronger” be bridged?

When it comes to Jim Collins’ influence in China, two of his books have to be mentioned. CITIC Press in China released his books Built to Last and From Good to Great in Chinese in May and October 2002, respectively. In fact, the real-time span of the two books is seven years. The Built to Last was published by Collins and Jerry I. Porras in 1994. In Forbes ’ September 2002 list of the “The Twenty Most Influential Business Books in Twentieth Century,” the book ranked second behind In Search of Excellence. With this book, the authors attempt to paint a picture of what “visionary companies” are: companies that have survived many product life cycles and many generations of active leaders, and have enjoyed a great reputation that has left an indelible mark on the world. “If you want to start a company, build it quickly, make a lot of money, cash out, and retire, then building a visionary company is not for you. If you do not have a drive for progress - an internal urge to never stop improving and going forward for its own sake - then building a visionary company © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 Y. Hu, Seismic Digital Shift, https://doi.org/10.1007/978-981-99-5953-2_3

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is not for you. If you do not have any interest in a values-driven company with a sense of purpose beyond just making as much money as possible, then building a visionary company is not for you. If you do not care about building the company so that it will be strong not only during your tenure but also decades after you’re gone, then building a visionary company is not for you.” In other words, the “core ideology” is almost as important as the core competencies for long-lived companies. From Good to Great set the stage for Collins’ second appearance on Forbes ’ aforementioned list. Although Built to Last was published first, Collins sees From Good to Great not as a sequel to the book, but as a prequel to it. From Good to Great is about how to transform an already high-performing organization so that it continues to excel, while Built to Last is about how to perpetuate the excellence of an already excellent company. Disciplined people, disciplined thought, and disciplined action are the decisive factors in moving from excellence to greatness. Of these, disciplined thought, the core philosophy of the company, is the protector of excellence. Here again, Collins emphasizes the importance of the cultural philosophy to the business. By the way, the name of the Taiwanese translation of From Good to Great is “From A to A+”, which is, in my opinion, more expressive than the mainland title. In fact, Collins was inspired to write From Good to Great by a former colleague at McKinsey. This colleague was unimpressed with the business bestseller Built to Last. In his opinion, the success of the company discussed in the book was common knowledge, and Collins merely gave an afterthought explanation—it was successful anyway, so he could explain it any way he wanted. The colleague’s words struck a chord with Collins. He was determined to explore the trajectory of corporate change and reveal the basic laws that make great companies work. To do this, he and his study partners spent five years carefully studying the performance of 1,435 listed companies with “good” performance in the stock market over the past 15 years; from these, they selected 11 “great-performing” companies and studied in depth how these companies went from “good” to “great.” The result of the study is that these “great” companies have many similarities. 1.1

Collins Dictionary

To describe “great,” Collins gradually refined a series of words, some of them clever metaphors, and some of them new concepts. It is these

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terms that have overturned much of the common thinking of managers and have enabled Collins’ management ideas to spread widely with their unique perspective and explanatory effect. To name just a few: Good/Great Collins defines “Good” as a neutral, even slightly derogatory, term. He said, “Good is the enemy of Great.” He defines “Great” as the ability to produce superior performance and to have a significant impact on the areas they touch. “To achieve ‘Great,’ you cannot say, ‘We’re good enough.’ You have to say ‘not enough’ so that your business becomes indispensable and so that when you leave, people feel like something is missing.” Fallure/Failure Many people do not know that Collins is a well-known American rock climber (he claims he would have competed as a member of the US climbing team if the Olympics had a climbing competition). “Fallure” is a climbing term, somewhat of a play on words, for the practice of climbers who, when they realize they cannot climb the rock along their chosen route, let themselves do a free fall, knowing that the bolts holding them to the rock surface are unlikely to dislodge the rope and thus bring such a fall to the bottom. Climbers are proud of their fallure because they did their best to climb. In his study, Collins felt strongly that the process of moving a company from good to great is like a rock climb. In this process, any gimmicks and trickery are useless; what is really needed is courage, perseverance, and composure. He said a meaningful passage, “I now see life as a series of choices between going to failure or fallure. Like an on-sight attempt, the next holds in life remain remain unclear and ambiguous. And that very ambiguity holds us back from making a fully committed attempt. We fail mentally. We let go. We take a nice controlled fall, rather than risking a bigger fall. But as with most hard sport climbs, going to fallure in life is scary, but not dangerous. Whether it be starting a business or publishing a book or trying an exciting new design, fallure rarely means doom. And most important, the only way to find your true limit is to go to fallure, not failure.” True entrepreneurs aspire to climb to the highest possible height and do not concede defeat even if they fall.

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Flywheel Effect/Doom Loop No matter how dramatic the end result, the transition from good to great does not happen overnight. There is no single decisive action, grand plan, trump-card-like innovation, lucky flip, or miracle moment that you can rely on to build a great company or social enterprise. Instead, the process is more like relentlessly pushing a huge, heavy flywheel, turn after turn, building momentum until breakthrough and beyond. In contrast, a very different pattern can be found in some other companies. Instead of taking a moment to think about what needs to be done and then executing it consistently, these companies frequently launch new projects (often with a lot of fanfare to “motivate employees”), only to find out that none of them produce sustainable results. They imagine that some single decisive action will allow them to skip the hard building phase and make a breakthrough. They would push the flywheel in one direction, then stop, change course, and throw it in a new direction and then they would stop, change course, and throw it into yet another direction. After years of lurching back and forth, the comparison companies failed to build sustained momentum and fell instead into what we came to call the doom loop. The Hedgehog Concept The ancient Greek poet Archilochus said, “The fox knows many things, but the hedgehog knows one big thing.” Collins believes there is a difference between a “fox” and a “hedgehog” type of business and entrepreneur, and all leaders who go from good to great are “hedgehogs.” The cultivation process of a good-to-great company leader is the process of gradually developing and fixing the “hedgehog concept.” There are three dimensions to the “hedgehog concept”: What are our core people most passionate about? What are we best and least good at? What is the biggest driver of our economic engine? Such a concept may make your business stand out. First Who… Then What Collins found that leaders of good-to-great companies did not first determine “where” to start reinventing the business, but rather “who” to implement it. He likened the company to a bus and the leader to the

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bus driver. The leader’s concern is not where to drive, but “get the right people on the bus, the right people in the right seats, and the wrong people off the bus.” “They first got the right people on the bus and then figured out where to drive it.” Level 5 Leadership One of Collins’ greatest discoveries was that humble leadership is one of the key reasons for the long-term success of many famous companies. He called it the Level 5 Leadership. Level 1 features personal skills, Level 2 team skills, Level 3 management skills, and Level 4 leadership skills. In addition to this, there is another level, Level 5 leadership. (1) Level 5 leaders are humble, do not like flattery, and never boast. (2) Level 5 leaders act calmly and firmly, not relying on personal charm, but by raising high standards to motivate their subordinates to make progress. (3) Level 5 leaders choose successors who can make the enterprise more successful in the future, not for themselves, but for the organization. (4) Level 5 leaders look out the window to apportion credit to factors outside themselves when things go well. At the same time, they look in the mirror to apportion responsibility, never blaming bad luck when things go poorly. In short, Level 5 leaders are a study in duality: modest and willful, humble and fearless, with the openness to accept the irrational state of the world, while remaining sober and rational and strong-willed deep inside. Clock Builder/Time Teller Collins argues that the title “leader” is not so appropriate, and that a better title would be “architect” or “clock builder.” “The critical question at the Constitutional Convention in 1787 was not ‘Who should be president? Who should lead us? Who is the wisest among us? Who would be the best king?’ No, the founders of the country concentrated on such questions as ‘What processes can we create that will give us good presidents long after we’re dead and gone? What type of enduring country do we want to build? On what principles? How should it operate? What guidelines and mechanisms should we construct that will give us the kind of country we envision?’” Extending to business management, he emphasized that the builders of visionary companies tend to be clock builders, not time tellers. “They concentrate primarily on building an organization - building a ticking clock - rather than on hitting a market just right

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with a visionary product idea and riding the growth curve of an attractive product life cycle. … The primary output of their efforts is not the tangible implementation of a great idea, the expression of a charismatic personality, the gratification of their ego, or the accumulation of personal wealth. Their greatest creation is the company itself and what it stands for.” 1.2

Collins’ Misconceptions

Although Collins analyzed American companies, he hit the nail on the head of Chinese entrepreneurs. They have been walking cautiously for 40 years, with a huge question in their mind: Can the gap between “becoming bigger” and “becoming stronger” be crossed or not? There is probably no place where entrepreneurs are more concerned about the road from good to great than the CEOs of China. It is no coincidence that the companies talking about building a “century-old brand” have also steeped up in recent years. The answer to this question depends, first of all, on the definition of what exactly constitutes a great company. It is at this point that I would like to remind Chinese companies that Collins’ conclusions are not without misleading. As a master of his craft, Collins’ study is insightful. However, despite the many facts he uses to describe the transition from good to great, I am deeply skeptical of the underlying assumptions of his study. Collins’ only definition of a great company is how well it has rewarded investors over a sustained period of time. In other words, the criteria he set for great in companies did not take into account the following factors: Did the company change society or the world at large? Has it best served its consumers? What has it done in the international marketplace? How does it treat its employees? Collins examined the stock market performance of 1,435 companies, looking for those whose cumulative 15-year returns exceeded three times the average return. Walgreens, a chain of discount drugstores, also became a favorite under this criterion. “From December 31, 1975, to January 1, 2000, $1 invested in Walgreens beat $1 invested in technology superstar Intel by nearly two times, General Electric by nearly five times.” This seems to be saying that Walgreens is greater than both Intel and General Electric.

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And look at Intel, which we all know helped create the semiconductor industry and the computer industry, it formed a cornerstone of Silicon Valley and changed the world as a whole. As for General Electric, it not only created wealth, but also trained a lot of people. None of this seems to matter to Collins. Collins believed in the scientific nature of his study. He repeatedly emphasized that he and his study team spent five years (five years for a dozen people) collecting 980 pieces of annual data, conducting 84 interviews with senior executives and directors of the companies involved, perusing the personal and professional records of 56 CEOs, and analyzing compensation plans, ownership, and more. Yet his study team, despite assembling mountains of material, would ultimately turn out a flawed list of great companies—because the very premise of the study was flawed. Moreover, this study was conducted on the basis of relatively outdated data, which could be called “driving while looking in the rearview mirror.” So, not surprisingly, Collins’ list is a big letdown. You wouldn’t know Circuit City, Kroger, or Walgreens. Any company you know, like General Electric, IBM, or Intel, is not on it. Not to mention the up-and-coming newcomers, like Amazon and eBay (Google and Facebook, on the other hand, have not even come out of nowhere yet). At the height of the dot-com bubble, Collins told a story: one of his students started a business in Silicon Valley that year and took his teacher’s ideas very seriously, talking to venture capitalists about how to build great and long-lasting companies relying on the business model she had conceived. The response she got was a strange look from the venture capitalists, one of whom said, in no uncertain terms, “We’re not interested in building great, long-lasting companies. We want ideas that we can cash in quickly and take the company public or sell it within 12 to 18 months. Think about it before you talk about it.” It hit Collins’ student right in the face: building great, long-lasting companies is no longer fashionable; what is popular now is “ready to build, ready to drift away.” In the age of the Internet, why work hard to create value like the entrepreneurs of the past, when you can make up a nice story, make a plan, and then, in the blink of an eye, the pie is already in your mouth? In the new economy, it is not only unnecessary but also foolish to invest continuous efforts to build a great company. Why does this oddity arise? Because venture capitalists and Collins are somehow applying the same criteria: a great company is one that delivers

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great returns in the capital markets. And I believe that it is precisely companies like Google and Facebook that dare to subvert the rules of Wall Street and pursue a deeper purpose without being led by quarterly statements that are truly great. Built to Last and From Good to Great are both about the same thing: the survival of a company is only the first step, it must also pursue a long life. From “not to die” to “last,” that is, building a great enterprise on a solid foundation is the highest level of corporate philosophy. This high level, by its very nature, is necessarily spiritual. Numbers do not lie, but numbers are not everything. “Great” is a qualitative concept, not a quantitative one. It is necessary to revisit Drucker’s teaching: “There is no law that says a company must last forever. On the contrary, there is a law that says that everything created by man will perish. It is remarkable that a company remains successful for 25 years. Corporate immortality is a Wall Street misconception.”1

2

P&G’s “One to Eight” Innovation Route

Success is an obstacle for those who succeed, and innovation is a shackle for those who innovate.

The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation (2008) by A. G. Lafley and Ram Charan is an innovative look at “innovation” that breaks the stereotype that only small businesses are the source of innovation (because they are more nimble and focused) and suggests that large firms can be just as innovative as (or more innovative than) small firms. Large firms have tremendous advantages in terms of size, management capacity, and resources to take risks, all of which encourage innovation, but in the real world of business they are often sapped by the bureaucratization of decision making, the strong incentives of internal vested interests to maintain the status quo, and the lack of processes for innovative growth. Lafley is qualified to write such a book. Since he was selected as P&G’s president and CEO in 2000, P&G’s sales have nearly doubled to $76 billion; the number of “billion-dollar brands,” that is, brands with annual

1 Schonfield E. Peter Drucker Interview. Business 2.0, Oct. 2001.

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sales of $1 billion or more, has increased from 10 to 23; and the company’s market capitalization exceeded $200 billion, placing it among the top 10 most valuable companies in the country and the top 15 most valuable companies in the world. What did he rely on? To help Chinese readers have a concise understanding, I have summarized P&G’s great turnaround as P&G’s “One to Eight.” 2.1

One Core Organizational Principle

“Every company has its own core organizational principle that people follow when making decisions, addressing challenges and creating opportunities,” said Lafley. “At P&G, that principle is innovation.”

This is just because innovation is the best way to win. Any company that wants to continue to grow and succeed in both the short term and long term must make innovation its primary driver. We live in an era of rapid change, where products and services that are unique today may become uncharacteristic tomorrow. For companies to win—to outperform their competitors and, if necessary, to change the rules of the game—they must find an entirely new way to sustain endogenous growth in revenues and profits, and to sustainably improve profitability. This means changing the way innovation is perceived, no longer as a task for one department, R&D, but as a critical foundation for a variety of key decisions—whether those decisions are setting goals, building strategy, structuring the organization, making resource allocations, or setting budgets and developing leadership. 2.2

Two “Key Moments”

P&G’s goal is to delight consumers at two “key moments”: the first “key moment” is when they buy a product, and the second is when they use it. To achieve its goal, P&G looks at the world through the eyes of consumers and seeks opportunities to develop new products. The reason for this approach is that P&G wins as long as more consumers buy and use P&G’s products, and buy and use them repeatedly. P&G wins as long as consumers are more loyal to P&G products and buy higher priced and more profitable products.

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2.3

Three Strategies for Innovative Growth

In terms of strategy, I was impressed by a quote from Lafley: P&G’s entire corporate strategy can now be written down on just one sheet of paper. First, focus on the growth of P&G’s core business. P&G has four core categories: fabric care, hair care, baby care, and feminine care. P&G ran into trouble in 2000 because it neglected these leading old businesses and used the profits and cash they generated to create new brands and new categories. By refocusing and revitalizing these core businesses, P&G has regained steady growth. Second, tilt toward faster-growing, more profitable, and more assetefficient businesses. This choice allowed P&G to focus on changing the game with its core strengths, resulting in big wins in businesses such as beauty, health care, and personal care. This is a useful complement to P&G’s focus on its core businesses. The extraordinary growth achieved in these areas has allowed P&G to achieve the perfect balance of stable performance and sustainable growth. Third, strive for win-win with low-income consumers, especially in the fastest growing developing countries. P&G achieved this growth by: increasing household penetration; implementing broader and deeper retail distribution; targeting consumers at different income levels with more brands and products separately; and establishing strong local presence. 2.4

Four Tasks of an Innovation Leader

To be a game changer, innovation leaders must accomplish four valueadded tasks in their daily work. First, establish a vision that cannot be achieved without the help of innovation. For example, the scope of Steve Jobs’ vision extended from personal computers to consumer entertainment. Second, motivate and inspire. Innovation leaders must motivate knowledge workers at both the individual and team levels because the outcome of the innovation process is uncertain in nature and contains a number of risks. Third, integrate. One of the most critical tasks in the daily work of innovation leaders is to tightly integrate the work of members across the organization. They integrate innovation into the day-to-day operations

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of the business, preventing it from being perceived as separate and “special.” They make sure that everyone is working as a team, not as separate businesses or departments. Fourth, innovate in a right way by solving key problems. 2.5

Five Key Things to Do for Innovation

First, put the consumer at the center of everything the company does. P&G’s brands touch the lives of consumers around the world three billion times a day. At P&G, the boss is not the CEO, the consumer is. Whether the source of innovation is a new idea, a technology, or a social trend, the consumer must be at the center of the innovation process from start to finish. Second, get more open. P&G used to do everything themselves, but then began to look for opportunities to innovate from a variety of sources inside and outside the company. It included all those who could be involved in innovation: past and present P&G people, consumers, suppliers, “connected and developed” partners, and even competitors. Lafley set a very challenging goal, requiring that half of the company’s new products and technology innovations come from outside P&G. The company has already exceeded this goal, compared with 15% in 2000. Third, make it a priority to achieve sustainable endogenous growth. Endogenous growth is less risky than growth through acquisitions, and it is driven almost exclusively by innovation: only 1% of P&G’s annual 5 to 7% growth comes from acquisitions. Fourth, manage with innovation in mind to drive sustained endogenous growth. This is done by: nurturing and improving innovation capabilities to ultimately turn them into sustainable competitive advantages; conducting regular reviews of business strategies and brand assets; conducting regular innovation reviews for each global business unit; carefully selecting and using the right evaluation metrics and incentives to encourage innovation; selecting, nurturing, and promoting leaders with strong performance who are also very good at leading innovation; and allocating sufficient financial and human resources to commercialize outstanding innovation projects. Fifth, start thinking about innovation in a new way. For example, manage innovation projects in a way similar to managing a factory; innovate not only in products, technologies, and services, but also include

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business models, supply chain management, concepts, and cost management; master certain tools and methods to control risks and improve risk management capabilities. 2.6

Six Factors for Designing an Innovative Organization

An innovative organizational structure should be “just right” and must balance structure and creativity. The role of the leader is to achieve this balance. Specifically, the design and selection of the organizational structure should consider the following six factors: whether the innovation opportunity is within the core business, in an area adjacent to the core business, or in a completely new business area; the level of risk and opportunity, and the size of the investment; the extent to which the innovation opportunity can leverage existing strengths or requires the nurturing and development of new capabilities; and the length of time for innovation development; what types of experience and expertise are required of the innovation development team; the stages of innovation development— idea and prototype development, formal development, qualification trials, or commercialization. 2.7

Seven Definitions of a Game Changer

It takes a lot of innovative thinking to change the rules of the game that have been in place for a long time. In the business world, motions for change are bound to encounter many obstacles, most of which are the product of “the philosophy of comfort and the tyranny of habit.” Winners who think creatively about breakthroughs in products and services are called “game changers” by Lafley and Charan. A game changer can be defined in seven ways: a strategist with a long-term view; a creator who sustains endogenous growth through innovation; a leader who understands that the CEO is not the boss, but the consumer is; an enabler who uses innovation to drive all elements of a business; an integrator who treats innovation as a complete process rather than a series of discrete steps; a breakthrough maker who takes innovation to build differentiated, value-added brands and businesses that break free from the shackles of homogeneity; and finally, a humanist who firmly believes that innovation is a social process.

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Eight Drivers of Corporate Innovation

Ultimately, for any company to innovate, it must manage eight drivers: an inspiring mission and values; stretching goals that can only be achieved through innovation; a strategy of choosing what to do and what not to do; a unique core strength; an organizational structure that lends itself to innovation; a unified and reliable work system; a courageous and wellconnected culture; and a leader who is a good motivator. These factors complement and mesh with each other, and for the CEO, the biggest drivers are undoubtedly goals and strategy, culture and leadership. P&G’s “One to Eight” redefines innovation. The book tells us to integrate all the components of the value chain so that innovation becomes a regular practice of value creation and that the consumer should always be at the center of this practice. Lafley says, “I have made countless attempts and mistakes and finally came to the realization that innovation is a complete process, a winning strategy that can change the game, and it will change the daily work and behavior of business managers and employees.” Therefore, companies that expect to make innovation their own working language and way of being must also keep two things in mind: success is an obstacle for those who succeed, and innovation is a shackle for those who innovate.

3

Companies That Seek Change

Businesses and organisms are very similar so that they can evolve in the same way. Once you train your organization to evolve easily and regularly, change is no longer a threat.

3.1

Why Change Management Does Not Work

There is a tool in management called “change management.” It is a method of changing individuals, teams, and organizations from the present state to some desired future state, and is an organizational process designed to help change stakeholders accept and embrace change in the business environment. However, this once familiar management tool is losing its importance for many companies. Just look at what happened to some of the most

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prominent companies in previous years. Kodak, Nokia, Motorola, Dell, Sony—each of these companies was a dominant player in their industries and markets before they fell down or fell into trouble, and they all made a big deal about their ability to change. However, in hindsight, their change management was a futile struggle to keep the world in the state it was in at the time. Why change management does not work? The most important reason is that change management assumes that companies can manage change. It assumes that change will eventually leave and be replaced by a new equilibrium. Implementers of change management often promise those affected by change, “We are now entering an extraordinary period, and let us overcome the difficulties to get through this period. When this period is over, we will reach a new period of ‘normalcy.’” In other words, change management is acting on an emergency basis. The problem, however, is that change is no longer a state of emergency. Change is the new normal. To use a familiar phrase, “The only thing that stays unchanged is change.” Change, like gravity, is always present. This forms the greatest paradox in today’s business operating environment: change is stable! A stable view of change requires that work can no longer be viewed as a series of stable periods separated by a number of moments of change; companies must see work as an ever-changing process that occasionally has moments of stability. In this process, the company has to seek change. A company that seeks change accepts change and turbulence as a competitive opportunity, an opportunity to promote its success, rather than as a threat or a danger. The difference between change management and change seeking is simple. Change management involves an urgent change with a purpose, a one-time act followed by a recovery period. In contrast, change seeking involves lasting change, where change serves the evolution of the business. 3.2

The Changes That Change

In the past, companies were in the driver’s seat, and good managers were able to navigate change as they decided when and how the company would react to the external world. Now, those days are gone, and you can no longer harness change, but change is harnessing you. This situation has arisen for a variety of reasons. First, everything in our world is changing faster than ever before, and not always in

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the same direction. Most companies are truly incompetent when it comes to addressing what causes change, how it affects them, and, more importantly, how they should adapt. Second, the Internet has made information nearly free and ubiquitous, which has further exacerbated the need for speed. Nowadays, the speed of decision making has become the key factor limiting the speed of company development. One could say that everything in a company is waiting— waiting for a decision. Once again, silos no longer exist, there is only one market, and that is the entire world. And, industry thresholds and barriers are increasingly being cut down, and your competitors may come from a completely different industry, and from a completely different frontier. Now, change leads to even greater change, and entropy begins to play a role in that. We live in a period of disorder, and that disorder spreads. In the past, we could make use of systems to fight the reign of entropy; in times of change, the rules are completely different. The things that worked in times of stability are also the very things that can take a business to the valley of death when things change. It is no longer even important to make the business bigger, more efficient, and risk-averse. The companies that do best in times of change and turnover are those who are small and bold enough to take risks. In many cases, the size of a business starts to work against itself. Change is not a shower, but an avalanche. We have to cope with changes in change, not just changes in us. 3.3

The Machine Metaphor Is Outdated

Successful businesses abhor change. People with good jobs reject change; they abhor chaos and disorder. Yet, the adventurers and startup entrepreneurs love change because only disorder can give them a chance to win market share and profits. In times of stability, managers treat their businesses like machines. They are concerned with reliability and a sense of control. All their managerial actions are aimed at eliminating variability, avoid taking risks, and make business operations reliable, predictable, and scalable. In times of change, this model is wrong. If you and your business cannot take advantage of change, change will defeat you. Our companies were once organized like large machines, and every aspect was designed to prevent big changes. Even when there were

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certain change-seekers in the business, management often forced them to stop doing that through corporate policies and measurement systems, preventing them from making what they thought was the right change by ordering and controlling the state of mind of their subordinates. This design assumes that change is controllable. What is happening now is precisely that change is no longer under our control. Our business organization assumes that we are living by a distinct and slowerrunning time cycle. However, time has suddenly become the enemy of business. For countless start-ups, stability is the absolute bad news. They realized that the old way of running a business—relying on highly profitable products and services and a manageable cycle of change to manage the business—was obsolete. Seth Godin says, “Our organizations are not independent machines, standing in the middle of a stable field. Instead, we work for companies that are organisms. Living, breathing, changing organisms that interact with millions of other living, breathing, changing organisms.”2 We even need a new vocabulary to describe such living organism, without which we cannot understand the mechanism of its operation. 3.4

Evolution and Experimentation

Two key words in the new vocabulary are evolution and experimentation. The way biological species respond to change is evolution. Businesses and organisms are very similar so that they can evolve in the same way. Once you train your organization to evolve easily and regularly, change is no longer a threat. Instead, it is an asset that is able to cause the demise of your competitors. True evolution is iterative, inheritable, and correctable. Iteration is the activity of repeating a feedback process, usually with the purpose of approximating a desired goal or outcome. Each repetition of the process is called an iteration, and the result of each iteration is used as the initial value for the next iteration. A positive feedback loop system is able to amplify the input and turn it into an output, and then return the output to turn it into an input. In the midst of change, when the market appears disorderly, it creates opportunities for those new players to seize early favorable conditions. 2 Seth Godin. Survival Is Not Enough: Why Smart Companies Abandon Worry and Embrace Change. The Free Press. 2002. 24.

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With planning and luck, or, in other words, preparation and chance, these initial favorable conditions are sublimated into a large lead, and the positive feedback loop enters a “runaway” state. This is a term coined by Ronald Fisher, a pioneer of evolutionary science, to describe evolutionary systems that are ahead of the curve and moving faster and faster.3 If firms rely too heavily on a winning strategy, they will not evolve fast. Every company in its infancy is a change agent. But success spoils most companies, so that they become too bloated, too rigid, and too afraid to change more because they believe in their “one-trick pony.” Excellent companies are not obsessed with excellence. In the words of Zhang Ruimin, in business, you can never think you are right, but always think you are not right. Iteration also means allowing internal entrepreneurs to conduct untold numbers of low-cost experiments each year, and then spreading the successful ones to others. Doing so establishes a dynamic process that significantly accelerates the pace of innovation within the enterprise. Experimentation is a necessary part of the search for change. Essentially, overcoming the fear of change by training employees to consistently make smaller and easier changes constitutes the essence of change. Most companies see change as a threat and survival as a goal. In fact, change is not a threat, but an opportunity. Survival is not the goal either; innovative success is the goal. Experimentation means taking a different approach to change, one that treats innovation and hustle as a good thing rather than a threat. Through experimentation, thriving businesses can be created, and the joy of harnessing them can be enjoyed through further transformation of the business and personal success. One type of positive feedback loop common in business is that companies that tend to change attract employees who want to cause change, and companies that fear change attract employees who resist change. Many employees are afraid of change. This is understandable; after all, change can lead to bad outcomes. But in today’s world, staying unchanged can be more likely to bring bad results than change. No one likes change, and we have a genetic predisposition to avoid it. The purpose of the change process is to redefine change at work as something that does not cause fear and panic. This will fundamentally

3 Ronald Fisher. The Genetical Theory of Natural Selection. Edited with a foreword and notes by J. H. Bennett. Oxford University Press. 1999.

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redefine our work tasks, thereby creating organizations that can succeed no matter what the changing future brings.

4

A Chaordic World

An ideal Internet organization would be one whose members are both owners and customers, both subjects and objects, and both superiors and subordinates.

In the book One from Many: Visa and the Rise of Chaordic Organization (2005), Dee Ward Hock refers to the concept of a new type of organization that is self-organizing, self-managing, and self-developing. He borrows the words “chaos” and “order” and calls such an organization a chaordic organization. In other words, he believed that the best state of an organization is one that has characteristics of both chaos and order.4 Hock is a business legend. He is the founder and former CEO of Visa Credit Card Organization. In 1968, he convinced the Bank of America to relinquish ownership and control of its credit card licensing system to form a non-stock company jointly owned by member banks, the predecessor of today’s Visa International. In 1984, Hock resigned his management position at Visa and returned to his estate on the Pacific coast of California to live a semi-secluded life. In explaining why he did so, Hock displays an extremely sober attitude toward business, despite his history of great success: “Through the years, I have greatly feared and sought to keep at bay the four beasts that inevitably devour their keeper - Ego, Envy, Avarice, and Ambition. In 1984, I severed all connections with business for a life of isolation and anonymity, convinced I was making a great bargain by trading money for time, position for liberty, and ego for contentment–that the beasts were securely caged.” Ten years later, Hock made a comeback with an ideal of developing a new kind of business and social organization. This new type of organization was what has been called “chaordic” organization—neither tightly 4 Dee Ward Hock. One from Many: Visa and the Rise of Chaordic Organization. Zhen Zhang (trans.). Shanghai: Shanghai Far Eastern Publishing House. 2008.

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controlled nor anarchistic, but a hybrid form of both. Hock founded The Chaordic Commons, a non-profit organization, to cultivate, disseminate, and implement a new organizational philosophy that would lead to a more equal sharing of power and wealth, and a more harmonious coexistence of organizations with the human spirit and the ecosystem on which they depend. When Hock goes around delivering his ideas, people listen carefully for one reason only: his credibility. Unlike most visionary thought leaders or management consultants who spend their lives just talking, Hock has put his ideas into serious practice. He ran Visa for 25 years using the same organizational principles he advocates today—decentralization of power, diversity, and innovation—and the success of the organization is obvious to all. Since 1970, Visa has grown to become the world’s largest retail electronic payment network platform. Visa far exceeds other credit card organizations in three major metrics: payments, transactions, and cards issued, and is almost twice the size of its largest competitor, Mastercard.5 The Visa card can be used at tens of millions of merchants in more than 200 countries and territories around the world, and can be used to withdraw cash from more than 1.9 million ATMs,6 making its usage rate second to none worldwide, serving billions of customers and trillions of dollars in annual transactions based on Visa products worldwide.7 Hock liked to play a game when he made a speech. He showed his Visa card to the audience in the room and asked, “How many of you recognize this card?” Everyone in the room raised their hands. “Now,” Hock then asked, “how many of you can say where Visa is headquartered? How is it managed? Where do you go to buy its stock?” The audiences exchanged doubtful glances. Most people probably had not even thought about the question. Just never think about it, Hock said, that would be right. “The better organized a company is, the less visible it is. At Visa, we try to build an invisible organization and keep it that way. It is the results, not the structure or management, which should come to the fore.” Today, Hock’s creation of Visa is not only high performing, but also dresses up 5 Visa—The Attack of the Giant. Financial Street. https://opinion.jrj.com.cn/2019/ 03/13091827158469.shtml. Mar. 13, 2019. 6 https://www.visa.com.cn/pay-with-visa/find-a-card/visa-classic.html. 7 https://usa.visa.com/dam/VCOM/download/corporate/media/visanet-techno

logy/aboutvisafactsheet.pdf.

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in mythology as one of the best examples of chaos theory’s dynamical principles applied to business. The Visa story began in the late 1960s, when the credit card industry was on the verge of collapse. The first credit card was called BankAmericard, from the San Francisco-based Bank of America, and it got off to a great start. The card did not meet competition until 1966, when five other banks in California joined forces to issue the Mastercard. Bank of America responded by developing franchises throughout the United States (banking laws at the time did not allow for cross-state branching), leading to a credit card war in which banks of all stripes followed suit with their own proprietary credit cards and franchise systems. Various customer directories were uncovered and countless pre-approved credit cards were sent to customers, even children, pets, and felons received cards. Fraud was rampant in this context, and bank returns were in tatters. Two years later, the credit card industry was nearly self-destructed into oblivion when Bank of America held a franchisee conference in Ohio where participants blamed each other and argued. Hock came on the scene at this time, when he was 38 years old, as vice president of a Seattle franchised bank. Just as the meeting reached an impasse, he proposed that a special committee be formed to systematically study the problems facing credit cards. The participants reached an agreement on this point and appointed Hock as the chairman of this committee. Hock had been waiting a long time to make a splash. During his previous business career, he had several times flat-out left several hierarchical, rule-bound, controlling companies, even though he was on a fast track to ascend within those companies. What he could not tolerate was a company that stifled the creativity and initiative of its employees, because it was often stagnant and unable to respond to any new challenges or opportunities that arose. Although Hock was a community college graduate, he dabbled in books on almost every subject, from history, economics, political science, natural science, and philosophy to poetry. From his extensive reading, Hock realized that the command-and-control organization that supported the Industrial Revolutions was no longer adequate. Not only were such organizations obsolete, they were increasingly irrelevant. The business world was facing a massive organizational failure. Hock was convinced that if he had the opportunity to create an organization, he would build it on the concepts and metaphors of biology. Now, as chairman of a special committee, he had a godsend. In June 1970, after

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two years of brainstorming, planning, debating, and consensus-seeking, the US bankcard system was incorporated into a new, independent entity that would later be renamed Visa International, with Hock himself as CEO. The new organization was different in every way: it was a non-stock, member-based, for-profit enterprise, with ownership taking the form of a non-transferable right to participate. Hock’s design for the organization reflected his philosophy: the organization had to be highly decentralized, but at the same time highly collaborative. Authority, motion, decision making, and wealth—all of these factors are pushed as far as possible to the edge of the organization, among the members. At its core, it is really about solving the problem of how an organization can be both competitive and collaborative: having each bank participating in Visa compete to serve its own customers and attract those of other banks, while maintaining a minimum level of collaboration to ensure that whichever bank’s Visa card is valid no matter where you are. The minimum level of collaboration means that the banks share certain common standards and participate in common clearing. This successful organizational design led to Visa eventually becoming the world’s largest credit card system. Hock concluded, “Any healthy organization needs clearly articulated and understood, commonly shared purposes and principles that form the genetic code of the organization. The better these purposes and principles are shared, the more you can dispense with command and control in the organization. People will know how to align with them, and then they will practice them in uncountable, incredible, creative ways. As a result, the organization will become a living, breathing community of faith.” Most interesting are the principles of organizational design proposed by Hock, which constitute perhaps the pioneering laws of twenty-firstcentury organizations. First, there must be equality within the organization, and the organization is shared by all participants. All the competitiveness of this organization in the end comes from the independent innovation of its members. Second, power and function must be decentralized to the maximum extent possible within the organization. Third, the governance of the entire organization must also be decentralized, and no single company or group of companies can jointly control the organization. Fourth, the organization must be very malleable, i.e., always changing. These principles proposed by Hock in the 1970s are very applicable today to the discussion of organizational forms in the Internet age. He

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also made a very interesting statement: “It looks like Visa is a holding company, but it is not really a holding company, because the holders are the members of Visa. These members are both owners and customers, both subjects and objects, and both superiors and subordinates.” An ideal Internet organization would be one that meets these principles and requirements.

5

Coasean Ceiling and Floor

There comes a point when a company expands and causes its own collapse. The question we need to examine is simply: at what point does a company become too large?

5.1

Hierarchical Organization and Transaction Costs

People in groups are so complex that they make groups difficult to form and difficult to maintain. Most of the reasons why traditional organizations show up the way we see them now are to cope with this difficulty. When an organization takes on a task, it should develop some control over the difficulty of coordinating multiple people, and the larger the group, the more urgent this need. The standard, or universal, solution is to set up a hierarchical structure that gives each person a place in the organization by role. According to Ronald Harry Coase, transaction costs can be reduced by building the management structure. Coase is known to have asked himself the most famous questions in economics: If the market is such a wonderful idea, why do we need firms? Why do we need all those organizational frameworks? Why cannot we just let everyone provide services to each other and solve all issues through markets and contracts? Coase found that there are significant transaction costs that give firms a relative economic advantage over the market in certain situations. Hierarchy greatly simplifies responsibility relationships and channels of information flow, and mega-organizations become manageable because of it. Of course, individual members of such an organization must agree to be managed, and such permission can often be achieved by paying

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compensation, and the amount of compensation received on an ongoing basis will likely depend on whether individuals are responsive to the needs of their managers. Typically, an organization will expand only if the benefits of mentoring additional employees are less than the transaction costs of managing them. If the transaction costs are too high, it is not cost effective for the organization to expand. Coase focuses on the corporate situation, but the issue of the cost of coordination applies to all types of organizations. Hierarchical organizations reduce, but do not eliminate, all types of transaction costs. Imagine a company with 1500 employees, where each manager manages 6 employees. There are six vice presidents under the CEO, each of whom directs the work of six supervisors. In such a company, there are already 3 levels of management from the boss to the employees. If you want to bring the employees closer to the boss, you must increase the number of employees each manager is responsible for managing. This will simplify the hierarchy, but also reduce the average management time each employee receives (or force everyone to spend more time communicating and exchanging information each day). When an organization grows very fast, it may reach a tipping point implied by Coase’s theory. At a certain point, it is impossible for an organization to continue to grow and maintain normal operations because the cost of managing the business will then eat up all the profits. You can think of this as the “Coasean ceiling,” beyond which the standard organizational form no longer works. Coase’s theory also tells us about the impact of small changes in transaction costs. When such costs decline moderately, we will see two changes: the largest firms will increase in size (put another way, the upper limit of organizational size is negatively correlated with management costs), while smaller companies will become more efficient. Smaller companies can do more business at a lower cost than their counterparts in higher transaction cost environments. These two changes can well describe the post-World War II industrial world: these companies, which excel at managing transaction costs, such as giant conglomerates like International Telegraph and Telephone (ITT) in the 1970s and General Electric in recent years, have expanded into many different types of industries. At the same time, the explosive growth of small and medium-sized enterprises is due to the fact that such enterprises are more adept at identifying and exploiting new opportunities.

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5.2

Hiding Under the “Coasean Floor”

The historical understanding about firms is that there is some kind of contract between the business and each of its customers, which may be expressed directly or implicitly. This is why a customer who has been victimized by an inferior product can bring a lawsuit against the company. But companies are not used to that users also form some kind of agreement with each other about the way they get along or transact when they act together. Such agreements are very important in social contexts, in some cases more important than agreements between companies and their customers. People can now easily organize groups, movements, and commercial forces online, shaking the fundamentals of many businesses and even industries, and possibly leading to their demise. The ability of people to form groups and act together outside of organizations is a huge change, and it has a warning or threatening implication for businesses. Such a scenario suggests that in addition to the Coasean ceiling, the Coasean floor should be considered. Most people overlook the role of Coasean floor. There will always be group activities that, although they create value, are not worth forming an organization for to support that value creation. Many possible goods and services were not realized because of transaction costs; however, with the advent of new technological tools, the barriers that once prevented sharing on a global scale have disappeared. It can be argued that these behaviors have fallen under the Coasean floor: they are valuable to some people, but too expensive to implement through any organization, because their basic non-demountable costs to the organization dictate that these behaviors are not worth implementing. However, the new tools offer us ways to organize group action without resorting to hierarchical structures. This is where Coasean logic gets inexplicable. The small reduction in transaction costs makes firms more efficient, because the constraints imposed by the organizational dilemma are less onerous. The “organizational dilemma” refers to a gap between an organization’s theoretical and actual capacity to manage resources as they are consumed; the larger the organization, the higher the costs. And the huge drop in transaction costs makes it impossible for firms, or for that matter any organization, to afford certain behaviors anymore, because no matter how inexpensive it becomes to engage in a particular behavior, there are not enough benefits to offset the costs of existing

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as an organization. With the ability to achieve large-scale coordination at low cost, a whole new situation has emerged: serious, complex work can be performed without organizational direction. Loosely coordinated groups can now achieve results previously unattainable by any organization, precisely because they are hiding under the Coasean floor and are not constrained by his theories. With such a sea change, companies should first figure out what customers might be better off doing themselves rather than companies doing it for them. If the answer is “everything,” then companies’ days are numbered. But if the answer is “with your help, the customer may do better,” then you need to think about how to help the customer. What if there was only one sample copy of each book in a large bookstore, and when a customer selected one, the bookstore could print it for the customer on the spot? What if the record store made the record that the customer wanted on the spot? In such scenarios, the consumer gets what they want, and the bookstore or record store no longer holds inventory, avoiding waste from upstream to downstream. Consumers expect to get exactly what they want, and will decide on their own when and how they get it. Gone are the days, for example, when a customer bought a record containing a limited number of tracks that were compulsorily selected by others. The music industry, the movie industry, the newspaper industry, and others must adapt toward a new paradigm in which the customer is not only always right, but they can implement their judgments with just a click.

6

Hacker Culture and the New Organization Theory

An ecology of talented hackers and local organizers can solve pressing challenges by distributing leadership to the greatest possible extent at the grassroots level.

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6.1

Hackers, the Cowboys of the Computer Age

Gary Hamel has built a website, the Management Innovation eXchange, which calls for a hacking campaign against management.8 The site proclaims, “To meet big, tough challenges, we need big, unconventional ideas. On this site, you can find suggestions that cross the line enough to change the way organizations operate and lead, whether it is developing strategy, allocating resources, designing jobs or reforming compensation systems.” Each breakthrough management proposition or radical solution is described on the site as “a hack at management.” One such initiative may address a very basic problem, such as how to have better meetings, or it may touch on a high-stakes area, such as an overhaul of the compensation system. But whatever the direction, it has to overturn the old day-today management practices, being crazy and impractical, and showing a pathway to the future. Hamel likens this to a “moonshot.” The connection between hacking and management is profound. Builders and destroyers are often two sides of the same coin. In hacker culture, disrupting the existing order is often a prerequisite for building a new one. Of course, if you merely disrupt, then you are not a hacker, but a cracker. Hacker is a computer term that comes from the English verb “hack,” which means “cleave, cut,” which also sublimates the meaning of “open up”; naturally, the word implies “do a very good job.” Computer hackers are obviously extremely good at what they know, and are all masters of programming. Another way to say this is that in the early twenty-first century “hack” meant “prank” in MIT campus slang, with anti-institutional overtones. This positive word was used in the 1960s and 1970s to describe independent-minded but law-abiding computer enthusiasts. They gathered in the bastions of the technological elite, MIT and Stanford University. Steven Levy’s book, Hackers: Heroes of the Computer Revolution, published in 1984, describes these guys in detail.9 During the laboratory days of MIT in the 1950s, groups of talented students formed teams and often worked all night in the lab operating 8 The Management Innovation eXchange (MIX). http://www.managementexchange. com/. 9 Steven Levy. Hackers: Heroes of the Computer Revolution. O’Reilly Media. 2010.

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machines. Most of the early hackers were mechanically gifted, skilled at seizing moments of inspiration and playing with a genuine love for solving problems. In the computer industry at the time, IBM ruled the roost. In the mid-1960s, IBM occupied 2/3 of the information technology industry, and only pushed the odd jobs that it did not care about other companies, which were like vassals to the king, and could only do some business that IBM was not interested in or produce small parts around IBM products. It was a popular saying at the time that IBM was not in competition with other companies, but rather an environment to which they had to adapt.10 IBM’s management style is commensurate with its prominence. IBM was a well-managed ship, with all of its employees well-trained, ruthless, invincible in the competitive marketplace, and absolutely loyal to the company. They were “machine-made” employees who strictly adhere to the company’s hierarchical relationship, and were the typical so-called “organization man”. It was ridiculed that IBM in this period was like a huge “concentration camp” in the information technology industry. IBM concentrated its human and financial resources on developing mainframes, because the expensive mainframes and their accessories were the most popular commodities in the military and civilian markets at that time. IBM never considered selling computers to ordinary people, preferring to sell large, often purpose-built computers to major customers. Part of the reason for this decision was that it predicted the future of information technology based on its own organizational structure, which was strictly hierarchical and centrally controlled. This was a good fit with the climate of that time. Prior to the mid-1970s, information technology left an impression of rigor and mystery to the public. At that time, the focus of information technology was on the development of expensive and mysterious machines that could only be operated by specially trained technicians. The language of computer science was filled with esoteric terms derived from mathematical information theory. Computers, as an extension of the human brain, were more associated with scientific study and major decisions, and not very relevant to the lives of ordinary people.

10 Theodore Roszak. The Cult of Information: The Folklore of Computers and the True Art of Thinking. Pantheon, 1986. 136.

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In the words of historian Theodore Roszak, IBM’s “decision to maintain its elitist style thus allowed a chink to open in the walls of the industry’s citadel. That chink was the microcomputer.”11 The personal computer has become almost synonymous with “high technology” today. However, this machine was not developed in a wellequipped laboratory and is very different from what people imagine when they hear the word “high-tech.” It was born out of computer hackers in garages, barns, basements, and bedrooms. It was these people, considered “computer nuts,” who ignited the personal computer revolution with their fervor for technology. Roszak remarks, “From its beginning, the microcomputer was surrounded by an aura of vulgarity and radicalism that contrasted sharply with the mandarin pretensions of the high tech mainstream.”12 In the late 1960s, the notions of autonomy and democracy promoted by the hippie movement laid the cornerstone of the personal computer revolution. This anarchism had a certain dangerous connotation that many people still believe today. But it starkly raised the flag of antiauthority. The hippies once denounced the computer as a symbol of centralized control, yet a small group of them soon realized its deeper potential: it would be a magic carpet to freedom. In the computer, they found the path to the future. They were surprised to find that the personal computer was going to create a realm that was as much about rock and roll or psychedelics as it was about getting people off the “beaten track” of industrial society. The early computer hackers were a very unique group of people. Many of them were said to be unsociable and unsophisticated, and seemed to know nothing but work. As a group, they had very little business sense and even less political awareness; they were some authentic technicians. By the late 1960s, a new group of computer hackers was emerging, many of whom were active members of the Anti-Vietnam War Movement in the West Coast. Fate had destined them to dramatically establish a new image of the computer, giving it a political dimension that IBM and other large

11 Theodore Roszak. The Cult of Information: The Folklore of Computers and the True Art of Thinking. Pantheon, 1986. 137. 12 Theodore Roszak. The Cult of Information: The Folklore of Computers and the True Art of Thinking. Pantheon, 1986. 141.

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companies had never given it. In their hands, information technology became an instrument of democracy to the maximum extent possible. Stewart Brand, editor of the Whole Earth Catalog, writes: “In the late 1960s and mid-1970s, just as the New Left was clamoring for political reform and clearly failing, a tiny offshoot of the counterculture movement was quietly and almost unnoticeably brewing a mass computer revolution, the success of which shook the world.”13 Among the hackers who participated in this revolution were two smart young men, Steve Wozniak and Steve Jobs. Together they founded Apple Inc. and developed the groundbreaking Apple II personal computer. Apple’s success proved to the world that the personal computer market was real. When IBM personal computers followed Apple’s lead in 1981, Apple took out a full-page ad in The Wall Street Journal: “Welcome IBM. Seriously. Welcome to the most exciting and important marketplace since the computer revolution began 35 years ago….”14 Inevitably, money makers come to the place where money is made. The monetary success of the personal computer industry, rooted in the hacker ethos, eventually severed the industry’s ties to its ancestral roots. However, the spirit of “computer power belongs to the people” promoted by the early hackers has left an indelible mark on the industry as a whole. Even the conservative IBM had to bend over backward to adopt open architecture and open operating systems. Proprietary architecture and proprietary operating system make the power of the mainframe computer belong not to the people who use it, but to the companies that make the machines; the personal computer, and the growing power it harnesses, should belong to the people. This is what Levy refers to as “The Hacker Ethic” in his history of hacking. The code of ethics includes: Access to computers should be unlimited and total. Information should be free. Mistrust authority — promote decentralization. Hackers should be judged by their hacking. 13 Fred Turner. From Counterculture to Cyber Culture: Stewart Brand, the Whole Earth Network, and the Rise of Digital Utopianism. University of Chicago Press. 2010. 14 John B. Murphy. 37 Years Ago, Steve Jobs Ran Apple’s Most Amazing Ad. Here’s the Story (It’s Almost Been Forgotten). Inc. https://www.inc.com/bill-mur-phy-jr/37years-ago-steve-jobs-ran-apples-most-amazing-ad-heres-story-its-almost-been-for-gotten. html. Aug. 23, 2018.

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You can create art and beauty on a computer. Computers can change your life for the better.15

No one wrote these guidelines into a manifesto, but they became the way hackers behaved when shaping computer technology. This way of behavior further influenced the software industry later on. 6.2

Open Source in the Bazaar and Closed Source in the Cathedral

An important difference between the Newtonian paradigm and the Einsteinian paradigm is that the former is a low-energy paradigm and the latter is a high-energy one. In a relatively stable low-energy world, the classical method of construction, like building a Cathedral, requires a tight management system and a closed centralized structure. There is a famous Brooks’ law in software development: as the number of developers grows, project complexity and communication costs increase quadratically by the number of team members, while the work product only grows linearly. In the book The Mythical Man-Month: Essays on Software Engineering (1975), software engineer Fred Brooks was the first to summarize the phenomenon that in software development projects, adding staff to a project with delays can make the project even more delayed. He metaphorically stated, “Nine women cannot make a baby in a month.”16 Eric Steven Raymond, one of the three great minds of the Open Source Movement, argues that when designing highly inflated software, it is necessary to avoid the project getting out of control due to its scale and complexity.17 There is an approach that he calls “the Bazaar.” It is a parallel, peer-to-peer, dynamic multi-person collaborative development model with a flat structure. Most of the participants are Internet volunteers with no contractual relationships, so they can come and go freely. The Bazaar is based on the premise of open source. The opposite of the Bazaar model is the Cathedral model, which is a closed, vertical,

15 Steven Levy. Hackers: Heroes of the Computer Revolution. O’Reilly Media. 2010. Chapter 2. 16 Frederick P. Brooks. The Mythical Man-Month: Essays on Software Engineering. Addison-Wesley. 1995. 17 The other two of the three great minds are Richard Stallman and Linus Torvalds.

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centralized development model that reflects a hierarchy pre-determined by power relations.18 In this seemingly chaotic and disorganized development environment of the Bazaar, where developers are often connected only by the Internet, high-quality software with high efficiency and vitality is produced, such as the world-class operating system Linux. How is this done? We will not go into the story of Linux, which to this day remains a classic case study that people cite over and over to illustrate selforganization, self-coordination, and open innovation from any angle. In The Cathedral and the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary, Raymond writes: “The most important feature of Linux, however, was not technical but sociological. Until the Linux development, everyone believed that any software as complex as an operating system had to be developed in a carefully coordinated way by a relatively small, tightly-knit group of people. Linux evolved in a completely different way. From nearly the beginning, it was rather casually hacked on by huge numbers of volunteers coordinating only through the Internet. Quality was maintained not by rigid standards or autocracy but by the naively simple strategy of releasing every week and getting feedback from hundreds of users within days, creating a sort of rapid Darwinian selection on the mutations introduced by developers. To the amazement of almost everyone, this worked quite well.” Clearly, Eric Raymond sees Linux as a triumph of broad libertarianism, and that is exactly what hackers have worked for. When it comes to the success of Linux, Eric Raymond believes that the “principle of understanding” has replaced the “principle of command” to allow hackers to form effective communities following their interests. The Linux world “behaves in many respects like a free market or an ecology, a collection of selfish agents attempting to maximize utility, which in the process produces a self-correcting spontaneous order more elaborate and efficient than any amount of central planning could have achieved.” The difference between seeking understanding and commanding is that the former inspires utility and the latter controls it. For hackers with extreme levels of skill, once they realize that their own value can

18 Eric Steven Raymond. The Cathedral and the Bazaar. Jianfan Wei (trans.). Beijing: China Machine Press. 2014.

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be maximized, they forget the pain they feel when writing documentation. Benefiting others by benefiting themselves is a manifestation of the subtle relationship between egoism and altruism. Raymond, a longtime tech junkie, recognized the role of “egoboo” early on. “Egoboo” is a shorthand for “ego boosting,” which means that volunteers feel happy to be recognized for their efforts. It is as if the anxiety and uneasiness of the writing process is swept away when the author sees his name in print on his work. Linux is an efficient market in egoboo “to connect the selfishness of individual hackers as firmly as possible to difficult ends that can only be achieved by sustained cooperation.” As the most efficient and least expensive medium of communication in human history, the Internet undoubtedly provided the environment in which open-source software emerged. Under this background, the closed-source Cathedral model is bound to be severely challenged by the open-source model, which can bring unsurpassed scale and collaboration advantages. Raymond is dismissive of the Cathedral model, although there are good ideas and sparks in the model. The fundamental problem with innovation, he argues, is not how it is generated, but how it is not suppressed. In the Cathedral model, “suppression” can also be understood as “strong management.” For the Cathedral model, acquiring outside innovative companies is a shortcut, but the results are often not good. Few innovative companies have been able to sustain their dynamism even after being absorbed by large organizations. “Strong management” in software development is much like what we call organizational management in a general sense: rigid development hierarchy, establishment of common goals, resource allocation, schedule monitoring, manpower deployment, etc. This thinking assumes that we are living in a resource-poor phase and that resources can only be used optimally if they are strictly deployed. So, this is the defensive approach to resource allocation. In open-source projects, hackers come together because of their interests and abilities. Thus, someone conclude that the only reason for an open-source project to fail is that the programmers lose interest. At the same time, an open-source culture can automatically filter out the top 5% of programmers without wasting costs on less capable members, as traditional organizations do. In traditional software development, about 60% of the project is not accepted or not recognized by the users. While in

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open-source projects, users and developers are one and the same, and it is basically impossible for a project to be unaccepted. The golden law of the software world, Conway’s Law, states: “The system being produced will tend to have a structure that mirrors the structure of the group that is producing it, whether or not this was intended.” This was stated by computer programmer Melvin Conway, whose alternative formulation reads, “Any organization that designs a system … will inevitably produce a design whose structure is a copy of the organization’s communication structure.”19 Raymond summarizes it as: the method determines the outcome and the process generates the product. The distributed nature of the Internet itself, as well as the peer-to-peer feature, naturally dissolves redundant multi-layered organizational structures; nodes cannot exist independently and only come into play when they cooperate with other nodes. According to Raymond, peer-to-peer is very important. This approach makes truly equal communication possible. Hackers join in order to solve a specific problem, each putting in effort and bringing in a lot of their own resources in order to demonstrate their strengths on that problem. The joy of problem-solving is the best incentive, as Raymond repeatedly emphasizes, “joy is the greatest asset” and “fun foreshadows efficiency.” Raymond refers to the traditional management model as the “Maginot Line,” which is complacent with its tight control of resources. However, the spirit of open source and the self-glorification of hackers make this line of defense virtually useless. Unlike the traditional management model that also works toward a common goal, which is like a reservoir that only limits the size of resources, the open-source model is like an ocean with numerous large and small inlets, with tributaries on top of tributaries. There are several key points to the success of the Bazaar model. Figure out whether it is the user’s needs or the developer’s needs. If the needs of users and developers are not in sync, then the enthusiasm of developers will be greatly reduced. Raymond believes that developers’ needs are the source of good software work. Google’s development rules are a good example of this. Most of the good Google software is developed by programmers in 20% of the time in their hands. Programmers do not have the time to interact passionately with users, they simply make an

19 Melvin E. Conway. How do Committees Invent?. Datamation. 1968. 14 (5): 28–31.

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interesting program for the convenience of their work. Google encourages employees to innovate and provides a showcase platform for users to evaluate. This is the story of Google Mail (Gmail). Figure out whether to rebuild or rewrite. Raymond said, “Good programmers know what to write. Great ones know what to rewrite.” That is, the ability to rewrite or overturn is important. It is within the Unix system that Linux was rewritten and maximizes the advantages of the original system. Get more users to become collaborators and release the system as early as possible. This is the best way to discover vulnerabilities. The discovery of vulnerabilities in the Cathedral model is a costly process, with a lot of manpower consuming a lot of time. Moreover, this can cause version updates to lag behind user expectations. The more users you attract, the more you can combat the complexity of the system. “Linus’s innovation wasn’t so much in doing quick-turnaround releases incorporating lots of user feedback, but in scaling it up to a level of intensity that matched the complexity of what he was developing.” The more people involved, the more likely vulnerabilities will be discovered, due to the fact that the views of a specific group of people are more predictable than the views of randomly selected people. Beta testers are the most valuable resource. These testers are often hackers as well, and they can find vulnerabilities and flag them at the source code. If one day these beta testers voluntarily ask to quit, it signals that the software project is nearing the end of its life cycle. For many traditional companies in China today, they only know about fan engagement, but not what Beta is. The most common misconception they fall into is that they tend to invite regular users who are not enthusiastic about the product principles during the product testing phase, rather than hacker-level users. Testing is also part of product development, and hacker-level users and developers have a shared mode of communication. The average user only describes issues of product’s features, which is of no real interest to the developers. Comments on source code are what developers expect. Have an editorially aware product leader. A good editor is not necessarily a good writer, but a good editor can make great reads. In Raymond’s eyes, one of the functions of a product leader is to “identify” ideas, not “produce” them. Summing up his Fetchmail project, he admits, “I restrained my tendency to be clever; this argues (at least) against design originality being essential for successful bazaar projects.”

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Knowledge Dispersion and Network Decision Making

The world is changing rapidly, and while we recognize that “modern” management, one of the most important inventions in human history, has greatly improved our organizations and society, it is an overly mature technology that must reinvent itself for a new era. Currently, most management practices emphasize control, discipline, and efficiency above all else. This is precisely the problem. To survive and prosper in the twenty-first century, organizations must be adaptable, innovative, inspiring, and accountable. This makes a revolution in management principles and practices necessary. As Hamel says, it is time for a hacker movement on management. Can management be as fast iterative as the software industry? Can organizations move beyond Brooks’ Law and Conway’s Law? Can organizations tolerate “management hackers” who have had enough of the frustration and chaos of organizational life and have risen to the occasion to overhaul it? To transform the management of old, inspired thinkers and radical doers must find alternatives to bureaucratic, hierarchical, centralized, and closed organizations. The iteration of knowledge is by no means a quick fix. We believe that there has been only one real revolution in the field of management, namely Taylor’s scientific management. The significance of scientific management is self-evident; for the first time, mankind used knowledge in the study, analysis, and design of work. Taylor’s principles were universal, allowing all jobs (which in those days meant manual labor) to be analyzed in the same way. Unfortunately, the resulting Taylorism became almost synonymous with evil because it left no room for the subtleties of human nature. Only Drucker, I am afraid, saw that Taylor was a man with a dream of building a new society at heart. The greatest thing about Taylor, according to Drucker, was that he saw what Marx missed, namely, that the contradiction between the working class and the bourgeoisie could not be resolved only by violent revolution. By equipping workers with the knowledge they need to do their jobs and thus improving their lives, workers can be transformed from “proletarians” to “proprietors.” In The New Realities, Drucker writes: “Without Taylor the number of industrial workers would still have grown fast. But they would have been Marx’s exploited proletarians.” “Instead the larger the number of blue-collar

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workers who went into the plants, the more they became ‘middle class’ and ‘bourgeois’ in their incomes and their standards of living.”20 Taylor saw that the productivity of factory workers could be increased through improved technology and management, not just through longer and more exhausting toil. And, workers can share in the fruits of that growth. Henry Ford, a faithful practitioner of Taylor’s ideas, not only invented the mobile assembly line, but also pioneered a significant increase in worker wages. In 1914, shortly after Ford Motor Company introduced the Model T, Ford made a shocking announcement: workers would be paid an unprecedented $5 a day.21 Well-paid workers generated consumer demand, which in turn fueled business expansion and increased employment. With the momentum of a virtuous cycle, the United States entered a golden age of sustained economic growth in the decades after World War II. It could be said that Taylor started a productivity revolution, thanks to knowledge. Taylor found that the key to productivity was knowledge, not muscle power, though sometimes the most important knowledge was instruction on how to organize muscle power. Drucker thus credits Taylor as the originator of knowledge management, since the very purpose of scientific management is to generate knowledge about how to improve work processes. In 1959, Drucker saw that what he called “knowledge workers” would replace manual workers at the heart of the workplace.22 At the end of the twentieth century, he suggested that “the most valuable asset of the twenty-first century, for businesses and non-businesses alike, is the knowledge worker and his productivity.”23 As a consequence, what Taylor tried to avoid and Ford reluctantly endured between the ears of workers has become the treasure of today’s managers. The greatest challenge facing managers today is how to effectively capture, utilize, and develop this knowledge in the minds of knowledge workers. This is called the second revolution in management.

20 Peter F. Drucker. The New Realities. Routledge. 1989. 183. 21 One of the Greatest Choices in the History of Management: Henry Ford

Doubled Workers’ Wages. Fortune.com. http://app.fortunechina.com/mobile/article/ 187540.htm. Dec. 12, 2013. 22 Peter F. Drucker. The Landmarks of Tomorrow. Harper & Row. 1959. 23 Peter F. Drucker. Management Challenges for the 21st Century. Harper Collins. 1999.

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Thus, “hacker” seems to be the most accurate name for the complex identity of future business people. A hacker here refers to a person who is passionate about and pursues a certain type of knowledge. People in the enterprise receive and accumulate knowledge, and the knowledge in turn acts on people. These people do not live in the traditional organizational pyramid, but are based on the network, and any of their knowledge tentacles can be connected with the network to generate value. For knowledge, the real opportunity for mass replication is the rise of software. Software production is a very different model from industrial production, especially the Bazaar models like the development of Linux, which fully exploit the individuality and peer-to-peer nature of knowledge and collaborate in an unprecedented sharing model. Its scale and efficiency are far beyond the imagination of industrialists. This knowledge revolution is happening at the root of the organization. Unlike traditional organizations that rely on the linearization of knowledge, the software revolution brought about by Linux relies on the decentralization of knowledge. Consistency in organizational decision making now comes from such decentralization. The process from decentralization to coherence has been described by some as “chaos.” However, the concept of chaos cannot be clearly expressed and is not conducive to managers’ ability to clearly sort out their decision-making processes. I prefer the term “market” because markets have subjects, describable dynamics, and, more importantly, free competition in the marketplace to generate decisions. Within organizations, the marketplace of ideas is a prerequisite for networked decision making. And networked decision making has become necessary because business leaders know that there is so much to know in this globalized world. They have had to experiment with a new, decentralized decision-making process that more effectively leverages the expertise of the networks that are all around them; they have followed the distributed leadership models that have become commonplace in large, collaborative web-based projects. This network of decisions includes both people with local needs and hackers with the ability to meet those needs. The term “local” here does not simply refer to locality, but to the scale of human action, which may be macro-scale, meso-scale, or bounded “little-box,” relevant to the frontline and the bottom. Who will undertake which projects respectively? Decisions are made by those who know the local needs best—those who

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know the problem best, and those who are most familiar with the possibilities of the project. Making decisions in this way is efficient and effective. It is effective thanks to the fact that it is a network. However, there are also many traditional elements about leadership. Leaders need to spend a lot of time on organizing activities and building partnerships. A leader’s competence comes from his ability to build a network around his ideas. An ecology of talented hackers and local organizers can solve pressing challenges by distributing leadership to the greatest possible extent at the grassroots level.

7

Four Pitfalls for Entrepreneurs

See the world as it is, not to take it for granted.

There are four dangerous pitfalls that all entrepreneurs face. The first pitfall is that the entrepreneur must face the reality that the new product or service he or she is offering is not a big success in the market originally envisioned, but is making inroads in a completely different market. Many companies fall into this pitfall because entrepreneurs insist that they know more than the market. So a strange phenomenon can occur: the business is actually on its way to success, but the entrepreneurial entrepreneur is unaware of it. One might even say that they refuse to succeed. Historically, most successful new inventions or products have not achieved their initial market intent. One example is the invention of the roller bearing by John Wesley Hyatt, who thought it would be perfect for use in the axles of railroad wagons. Previously, oil-soaked rags had been used to reduce friction on the wheels. Hyatt did everything he could to persuade the railroad to adopt his new invention, but the latter refused to discard the rags, and Hyatt’s company was forced to declare bankruptcy. Alfred Sloan, a legendary figure in the history of General Motors, instead convinced his father to buy Hyatt’s small company at this time. Unlike Hyatt, he was willing to take this product to a completely different market, the fledgling automobile market. Within two years, the rollerbearing business was booming. For 20 years, Henry Ford was Sloan’s biggest customer. Why would an entrepreneur turn away from success delivered to his door? The reason is simple: it does not fit their plans. Entrepreneurs

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believe they can control everything. This leads directly to the second pitfall: entrepreneurs believe that profit is the most important thing for a new business. In fact, profit is second to cash flow. It is important to note that startup entrepreneurs are not the only ones who are too indifferent to the concept of cash flow. Warren Buffett once said that he does not go through securities analysts to find out how well a company is doing, because they talk about earnings and that is simply not relevant; he will listen to the bank credit analysts because they’re talking about cash flow. Assuming that the business focuses on cash flow and achieves rapid growth, there is a third pitfall waiting for the entrepreneur, namely, the management capacity cannot keep up with the development momentum. Rapidly doubling growth puts tremendous pressure on a business, and the entrepreneur sees sales climbing and profit curves rising, but often fails to see the erosion of their management base. 80% of companies fall from this pitfall into the realm of doom and gloom. Even if your business is growing at a normal rate, by the fourth year or so, management strains will hit the startup hard. When does a tension arise between a startup’s ability to manage and grow? If a customer says, “We will sign a contract with you if you can make 10,000 of a certain product,” and you’re thinking, “What a great opportunity, but I am a little concerned that we do not have enough capacity,” that is when the tension sprouts. To avoid such crises, entrepreneurs must assemble a startup team. At the beginning of the business, a typical entrepreneur has to do everything himself, he has helpers but no colleagues. It takes at least a year or even a year and a half to build a team. The last pitfall is also the most confusing one: when the business is successful, the entrepreneur starts to put himself before the business. He has given so much to this business, the business is thriving, the team is good, and now he asks himself, “What do I want? What is my role?” This kind of thinking is likely to ruin himself as well as the business. What he should be asking himself is: “What does this business need at this stage? Do I have the capabilities it needs?” In many cases, external forces are needed, as someone kicks the entrepreneur severely, prompting him to face the harsh reality that the job he has done for a long time is no longer an enjoyment.

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Drucker advocates an “intellectual integrity” in leaders. It is the ability to see the world as it is, not to take it for granted.24 It requires entrepreneurs to approach their work in a spirit of objectivity. If you start a business, you should realize that entrepreneurs are not their masters, but servants of the business they are creating. It is your responsibility to put your loves, hopes, preferences, etc. under the business. In short, ask not what the business can do for you, but what you can do for the business. Take your ego out of the decision.

8 From Big Company to “Entrepreneurial Company”25 A perfectly network enterprise is made up of numerous “entrepreneurial companies.”

Many people worry that if whales disappear from the earth, the mysterious ecosystem that has operated for tens of millions of years deep under the sea will be destroyed. However, the extinction of the dinosaurs hundreds of millions of years ago did not bring about ecological disruption, but rather what scientists call “competitive release.” After the extinction of the dinosaurs, mammals grew explosively, with more food resources available to mammals and much more efficient feeding. Similarly, the fall of the “dinosaurs” in the business class is never a bad thing. As outstanding talents are exiled outside the organization, some of them will give full play to their “entrepreneurial spirit” and make their own career with the resources and technology they have mastered. In the 1970s, the Israeli military developed its own Lavi Fighter, a highly capable fighter jet. By the early 1980s, the production of the Lavi Fighter was halted after only three fighter jets were produced due to pressure from the United States. Although the project was canceled, the 1,500 engineers involved in the Lavi Fighter project entered the industry and directly contributed to Israel’s development as a high-tech power. Similarly, IBM withdrew from the Indian market in 1977 due to Indian government restrictions, but a large number of former Indian employees 24 Robert Lenzner, John R. Searle. Seeing Things as They Really Are. Forbes. https:// www.forbes.com/forbes/1997/0310/5905122a.html# 2d6849aa24b9. Mar. 10, 1997. 25 Co-authored with Hao Yazhou.

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of IBM started a boom in local entrepreneurship, and years later, India has brought together a group of talents specializing in global IT technologies. We are not here to advocate a Tom Peters-style orgy celebrating the sensational fall of all giant organizations—after all, it is the big companies that are the main drivers of the industrial-age economy. But when it suddenly becomes clear that assumptions about the existence of companies are about to change or have changed, we have to acknowledge the reality that the old way of distinguishing between “big” and “small” companies seems too simplistic and not objective. McKinsey wrote years ago that in the business ecosystem of the future, there will be whales, cuckoos, and probiotics living side by side.26 This view, which is characteristic of industrial-era economies, seems obsolete today, as it cannot explain the existence of a community of makers, let alone the self-revolution being carried out by large companies like Haier and Alibaba. 8.1

The Rise of the Network Enterprise

Welch’s 1992 annual report included a line that is still held as the bible of change: “We are committed to embedding the spirit of a small company and the speed of a small company into the fabric of our larger companies.” He was joined in this view by Percy Barnevik, president of ABB. His strategy eschews the corporate center almost entirely, handing over responsibility to different small, personalized business units. Barnevik’s logic is simple: success only favors companies that act quickly, those that add value to their products through quality, service, innovation, and proximity to customers.27 Similar is the case with Kazuo Inamori’s famous amoeba organization.28 In The Rise of the Network Society, sociologist Manuel Castells divides organizations into two types: those whose primary goal is the reproduction of their own system of means, and those whose goal is to shape and

26 Andrew Grant. Whales, Cuckoos and Probiotics. Sina Finance. http://finance.sina. com.cn/leadership/sxyxx/20060707/15282714567.shtml. July 07, 2006. 27 Peters. The Tom Peters Seminar: Crazy Times Call for Crazy Organizations. Xunfeng Jiang (trans.). Beijing: CITIC Press. 2006. Chapter 1. 28 Kazuo Inamori. Amoeba Management. Translated by Zhong Chen. Beijing: Encyclopedia of China Publishing House. 2009.

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continually reshape the structure of the system of means. Castells calls the first type of organizations bureaucracies and the second type enterprises.29 Based on the distinction between the two types of organizations, Castells proposes a definition of the “network enterprise”: a specific form of enterprise in which the system of means is formed by the interweaving of parts of each autonomous targeting system. Thus, the performance of a given network depends on two attributes of the network: first, connectedness, which refers to the structural ability to facilitate unhindered communication among its components; and second, consistency, which refers to the degree of commonality of interests between the network goals and its components. Castells’ compendium of the network enterprise derives from his analysis of the interplay between industrial organization and production methods since the industrial age. First, there was a shift from mass production to flexible production. Mass production is represented by Fordism, the principles of which are rooted in Taylorism and the scientific organization of work. Fordism has the advantage of enjoying productivity gains through economies of scale, but it also suffers from the disadvantage of the inability to accurately predict worldwide market demand and the difficulty of striking a balance between quality and quantity. Mass production is matched by a specific form of organization: large companies are structured according to the principles of vertical integration and institutionalized social and technological division of labor. Since the system of mass production was too rigid, there was a need for flexible production. The new production system transforms the assembly lines characteristic of large companies into easily programmable production units that are sensitive to both market fluctuations (product flexibility) and changes in technological inputs (process flexibility). The quintessential embodiment of flexible production is Toyotaism, which emerged after Fordism. According to Castells, the real characteristic of Toyotaism lies not in the division of labor relations within the enterprise, but in the relationship between managers and labor. Whereas American companies used to emphasize efficiency through a careful division of labor and a clear division of work, Japanese companies valued the ability of work teams to spontaneously handle urgent matters on the job site.

29 Manuel Castells. The Rise of the Network Society. Zhujiu Xia, Zhihong Wang, et al. (trans.). Beijing: Social Science Academic Press. 2003. 146.

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However, Toyotaism actually maintains the same principles of mass production as Fordism, except that its process of organizing production utilizes employee initiative and the ability to provide feedback in order to eliminate waste of time, efforts, and resources. In this way, it is simply an extension of Fordism and does not guarantee the survival of companies in the increasingly fast-moving vortex of the world economy. Toyotaism is a management system designed to reduce uncertainty rather than encourage adaptability. This is why the network enterprise has made its debut. Companies have had to change their organizational models to adapt to the unpredictable conditions brought about by rapid economic and technological change. The network enterprise heralds a major organizational shift: from a vertical hierarchy to a horizontal corporation. Castells believes that if large companies themselves can reform and transform their organizations into a new network that articulates multi-functional decisions, they can truly achieve a superior form of management in the new economy—the only form that adapts to an information-based global economy. 8.2

One Person Is a Company

Castells believes that companies that survive on mass production will not die, but that does not mean that large companies will not die. He has a distinct assertion: for the first time in history, the basic unit of economic organization is no longer a single subject—whether individual (e.g., an entrepreneur or a family of entrepreneurs) or collective (e.g., the capitalist class, the corporation, or the state). This unit now becomes a network of various subjects and organizations that continually modifies itself as that network adapts to the supportive environment and market structure. Networks are open structures, capable of unlimited expansion, and integration of new nodes, as long as these nodes are able to share the same communication codes (e.g., common values or performance goals) within the network. Network-based structures are highly dynamic, allowing for innovation without threatening their equilibrium. Both Fordism and Toyotaism are no longer adequate in this new economy, where the main competitive advantage can no longer be gained by fine-tuning the process (whether it is lean production or Kanban management), but has to be captured by a qualitative change in the production process itself. This is why entrepreneurs of this era relentlessly seek new management models, scientific breakthroughs, synergies, and win-win situations.

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The network enterprise is a response to more efficient production, larger markets, and faster mobility. The first batch of network enterprises put pressure on other forms of organizations to reorganize into similar enterprises. The formation of network enterprises is then attributed to the performance of the nodes. In an enterprise, nodes consist of the smallest operating entities, i.e., individuals or small teams. A perfectly network enterprise is made up of numerous “entrepreneurial companies.” From this point of view, Haier is implementing a networked strategy that is painted with a distinct revolutionary color. The essential difference with General Electric and ABB is that Haier aims to completely eliminate the pyramid structure from large to small, turning large companies into small ones, turning small companies into micro ones, and finally making individuals CEOs who directly face the market. In this context, we can no longer use terms “big” or “small” to measure such a corporate move, and the liberation of “people” seems to be the only reasonable perspective. “The success of the CEO of each enterprise in the future does not lie in how many products your enterprise has made for society, but in how many CEOs you have made; it lies in whether you have created a platform for each employee to realize his or her own value, so that the enterprise can achieve sustainable operation.” So said Zhang Ruimin. This also seems to find a landing point for Castells’ “network enterprise” that floats in the air. In the face of networked individualists, what can companies do? The answer is: turn themselves into a network without boundaries, and turn the human resource capacity into nodes. The network enterprise is more like a community of symbiotic interests. 8.3

Imbalance of Network Organization

Zhang Ruimin especially mentioned “scale-free supply chain” and extended it to “scale-free user experience and scale-free employee innovation.” In network theory, scale-free network is a complex network with a class of characteristics, and its typical feature is that most of the nodes in the network are only connected with few large nodes, and such key nodes are called “hubs” or “hub-and-spoke nodes.” If every employee in a network organization is a node, then the distance between nodes will definitely increase. Nodes are like magnets, some have a super strong attraction and some are weaker. In other words, the nodes are not equal

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to each other, and therefore, the network organization is definitely not balanced and some problems will arise. First is the problem of connectivity. In the era of Internet fragmentation, there will be a situation where every time a node and its associated connections are removed from the network, other nodes in the original network may also be affected. Two nodes that were connected may no longer be connected; even if they are still connected, it may take longer to travel from one to the other. In general, the connectivity of the network is reduced. Therefore, how to enhance the non-removability as well as the connectivity of each node is an urgent problem for network organizations. The next issue is consistency. This is probably the more critical test. Negroponte described such an experiment in Being Digital: The experimenter asked more than a thousand people in a large auditorium to start applauding, and keep the applause as coherent as possible. It turned out that although there was no one to direct, the applause was initially disorganized but the rhythm was soon consistent. Negroponte realized that our knowledge of coordinated behavior arising from completely independent actions is still very superficial to explain such phenomenon. The “Negroponte’s applause” shows the synchronization of networks—even if the capacity of a single node increases, asynchrony throughout the network will finally push the efficiency enhancement in the network organization to failure. There are various factors that determine the synchronization of the network dynamics, such as the characteristics of the node dynamics, the coupling of the nodes, and the structure of the network. While most large companies can take information technology to solve the problem of connectivity in organizational change, they are hampered by the problem of “consistency.” Any new organizational model means breaking the old assumptions, and the biggest problem of the old assumptions is their static nature and neglect of multi-faceted human nature. The ultimate goal of management is to liberate human nature. In a network enterprise, the productivity and competitiveness of nodes depend on their ability to generate, process, and effectively apply information-based knowledge. Thus, big companies are no longer “big.” Treat every employee as a node and inspire their entrepreneurial spirit, and slowly the network will become a “big” company.

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9 The Best Enterprise Leader Becomes the Enemy of the Enterprise Today, the most successful management stories are not the triumph of the company, but the triumph of the disruption of the company.

9.1

The Management Science Has Come to an End

In July 2012, Foreign Policy magazine published an article titled “The Future of Manufacturing Is in America, Not China” by Vivek Wadhwa, Director of the Center for Entrepreneurship and Commercialization at Duke University. Vivek Wadhwa predicts that “Technical advances will soon lead to the same hollowing out of China’s manufacturing industry that they have to US industry over the past two decades.” He predicts a “creator economy” in which mass production is replaced by personalized production.30 In the same year, Chris Anderson, editor-in-chief of Wired magazine and originator of the “long tail” law,31 published a new book, Makers: The New Industrial Revolution, in which he discusses the maker culture. He argues that the latest digital technology meets the classical art of “do-ityourself” craftsmanship, constituting a “new industrial revolution.” The industrial revolution that began in the eighteenth century is now in its third round. Anderson was determined to practice what one preached. He left Wired, which he had edited for 11 years, to start 3DRobotics, whose main business is building drones using 3D printing technology. In a change from software’s long reign in IT, Anderson’s venture represents a “hardware renaissance” as open-source hardware and 3D printers bring manufacturing to the personal manufacturing stage. As product design and prototyping accelerate, a “long tail” market for manufactured goods will be created. More than 200 years have passed since the publication of Adam Smith’s The Wealth of Nations (1776), which talked about the division of labor in 30 Vivek Wadhwa. The Future of Manufacturing Is in America, Not China. Foreign Policy. https://foreignpolicy.com/2012/07/17/the-future-of-manufacturing-isin-america-not-china/. July 17, 2017. 31 Chris Anderson. The Long Tail. Jiangtao Qiao (trans.). Beijing: CITIC Press. 2006.

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its first chapter, and now we can turn our attention to the theory of “joint labor.” Companies are moving toward a decentralized-plus-cooperative form of existence. By “decentralized,” I mean that 3D printing has led to tens of thousands of small producers challenging the traditionally large producers at the center. With the gradual flattening of manufacturing, everyone becomes a producer. Meanwhile, we can also connect millions of producers and sellers in virtual space through the network, as Etsy has done. On this website, a decentralized network of millions of people replaces all the middlemen from wholesaler to retailer and eliminates transaction costs at every stage of the traditional supply chain. “Collaborative,” on the other hand, means that in the post-industrial era, networks are in fierce competition with the marketplace, and open communities are challenging exclusive business operations. Typical examples are Linux versus Microsoft, Wikipedia versus Britannica, etc. This third type of collaborative effort, which originates from outside the two traditional resource allocation models of the state and the market, is called “commonsbased peer production” by the American scholar Yochai Benkler. In his view, non-market, non-proprietary production by individuals and loose or close collaborators is playing an increasing role in the exchange of information, knowledge, and culture, and is impacting market-based proprietary production.32 As another American scholar, Jeremy Rifkin, has pointed out, “The shift from markets to networks has brought about a very different business model. The adversarial relationship between seller and buyer has been replaced by a cooperative relationship between supplier and user, and egoism has been replaced by shared interests. The parochialism of information privatization is eclipsed by openness and collective trust.”33

This decentralized-plus-cooperative form is bound to bring a shock to the management legacy of the twentieth century, which has probably come to an end as we know it.

32 Yochai Benkler. The Wealth of Networks: How Social Production Transforms Markets and Freedom. Yale University Press. 2006. 33 Jeremy Rifkin. The Age of Decentralized Capitalism. Global Business. http://finance. ifeng.com/opinion/fhgcz/20120712/6749414.shtml. July 12, 2012.

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The New Way of Organizing the Economy Will Be More Like the Marketplace

Enterprise leaders see themselves as champions of the free market, yet the enterprises they manage were created to circumvent the market. The enterprise emerged in response to the challenge of organizing thousands of people in different places with different skills to accomplish huge and complex tasks, such as building cars or providing a wide range of telephone services. It had a brilliant track record during the Industrial Revolution, but 200 years later, we urgently need a new way of organizing people and allocating resources. Today, the most successful management stories are not the triumph of the company, but the triumph of the disruption of the company. In this sense, Jack Welch may be the last great company founder. But even Welch himself was known for challenging the bureaucracies. Other management stars have gained fame for attacking entrenched corporate cultures, disrupting corporate structures, and making elephants dance with revolutionary strategies. In other words, the best enterprise leader becomes the enemy of the enterprise. The reason is obvious. Enterprise is a form of bureaucracy, and managers are bureaucrats. The basic tendency of bureaucrats is to perpetuate themselves, so, by definition, bureaucrats resist change. Their task is not to strengthen market forces, but to replace or even resist them. Even the best enterprises are not capable of protecting themselves from the conflict between disruptive, whirlwind change and corporate inertia. As Zhang Ruimin points out, the decline of Japanese companies is not due to “bad” management, but because they followed the dogma of “good” management. They listened carefully to their customers, studied market trends carefully, and allocated capital to innovations that might bring the greatest returns. In the process, they missed out on the disruptive innovation opportunity to develop new customers and markets. The weakness of a manager-controlled enterprise that cannot cope with accelerated change is only one of two wings of a business that is being attacked from both sides. The other wing is that the basic theory of firm existence is now untenable. In 1937, Ronald Harry Coase published the article The Nature of the Firm, arguing that “The main reason why it is profitable to establish a firm would seem to be that there is a cost of using

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the price mechanism,” that is, transaction costs.34 For any given task, to find the right person in the market at the right time to perform it is too costly and too complex, likewise, to find suppliers, negotiate prices, regulate performance, protect trade secrets, and so on, is not at all feasible in an open market. The enterprise may not necessarily be better at deploying labor and capital than the market, but it can reduce transaction costs and thus compensate for the weaknesses of the market. Coase was awarded the Nobel Prize in Economics in 1991, at the dawn of the Internet era. Since then, a quantum leap has been made in the ability of people living on different continents with different skills and interests to work together to accomplish complex tasks. Extremely ponderous undertakings, such as writing Wikipedia and synthesizing the Linux operating system, have achieved great success with little or no management required. Techno-utopians like Don Tapscott, who witnessed such achievements, thus predicted that “mass collaboration” was now the new form of economic organization. He believes that the corporate bureaucracies will disappear and that individuals will now be empowered to work together to create “a new era, even a golden age, comparable to the Italian Renaissance or the rise of Athenian democracy.”35 This is of course highly exaggerated, and it would be difficult for the most unrealistic technology enthusiast to imagine, for example, a Boeing 787 being built through “mass collaboration.” However, the trend is already in place, and there is no denying that transaction costs are rapidly decreasing. We now have both the need and the opportunity to design a new way of organizing the economy and a new science of management to respond to the staggeringly changing realities of the twenty-first century. This new way will be more like the market and less like the enterprises of the past.

34 Ronald Harry Coase. The Nature of the Firm. Economica. 1937. 4 (16): 386–405. 35 Don Tapscott, Anthony D. Williams, Wikinomics: How Mass Collaboration Changes

Everything. Portfolio. 2008: 15.

CHAPTER 4

Talent Has No Limits: On the Right Talent

1 The Boundary Between Innovation and Imagination We are increasingly leaving a world where value is created by vertical command and control while moving into a world where value is created by connecting and collaborating with others horizontally.

1.1

High-Imagination-Enabling Countries and Low-Imagination-Enabling Countries

At the 8th Online Business Conference hosted by Alibaba in September 2011, Thomas Friedman, author of The World Is Flat: A Brief History of the Twenty-first Century (2005), was invited by Jack Ma, then Chairman of the Board and CEO of Alibaba Group, to exchange views with e-tailers on the changing world and their personal development via remote video conversation. Thomas Friedman is a reporter for The New York Times and a threetime winner of the Pulitzer Prize for journalism. Prior to the publication of The World Is Flat, he was already recognized as an influential journalist in the United States. The World Is Flat proposes globalization as an international system that replaces the Cold War, and is thus considered a fundamental reading on globalization. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 Y. Hu, Seismic Digital Shift, https://doi.org/10.1007/978-981-99-5953-2_4

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At the event, Friedman talked about a new book he co-authored with his friend Michael Mandelbaum, a foreign policy expert at Johns Hopkins University, That Used to be Us: How America Fell Behind in the World It Invented and How We Can Come Back (2011).1 The book covers the problems and challenges facing the United States, a topic he intends to share with Chinese e-tailers, as China would step into the same situation as the United States. According to Friedman, the world has changed a lot since The World Is Flat came out, for example, with the advent of social media, which has made societies more connected and interdependent, and problems in the United States would be transmitted to China and vice versa. Friedman said that the more interconnected the world becomes, the more dramatic the change and the greater the demand for innovation. In the future, the world will no longer be divided simply by developed and developing countries, but rather into high-imagination-enabling countries and low-imagination-enabling countries. “When I come up with an idea, I can hire someone in Taiwan to shape it into a design, hire a manufacturer through Alibaba in Hangzhou to produce it, and then stick a corporate logo designed by a website, so that the real value added is reflected in the initial idea…” So, the countries in this world are either high-innovative or low-innovative. 1.2

Think Like Three Groups of People

How do you adapt to today’s highly interconnected and innovationdemanding world? Just like the high-imagination-enabling countries and low-imagination-enabling countries, people can be divided into two categories, those who are high-imagination-enabling and those who are low-imagination-enabling. In distinguishing between the two categories of people, Friedman lists three ways of thinking: – Think like immigrants. After arriving in a new country and a new environment, immigrants have to work harder than natives to find the job that is right for them.

1 The Chinese translation (translated by He Fan) is published by Hunan Science and Technology Press in 2012.

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In 1984, the United Nations designated the Statue of Liberty as a World Heritage Site, celebrating its identity as “a masterpiece of the human spirit” and its inspiration for “contemplation, debate, and protest” as a symbol “of ideals such as liberty, peace, human rights, abolition of slavery, democracy, and opportunity.” In the eyes of many immigrants, the Statue of Liberty represents a dream and new opportunities. Why do people immigrate? Why do they seek social mobility? To put it bluntly, it is to find where to better realize their self-worth. Therefore, the spirit of immigration means self-improvement and struggle. There is a much-used metaphor for the use of the Internet; that is, young people are the aborigines of the Internet, while the older generations are the new immigrants; new immigrants have to learn all the skills of the aborigines to survive in the land of the aborigines. The employees of all companies undergoing an Internet-oriented transformation are immigrants to the Internet because they are constrained by the original paradigm and rarely able to adapt to the new reality. User interaction, community-based promotion, multiple iterations, user experience, traffic channeling, and community building… Any young employee working for an Internet company is more skilled at these than a veteran in a traditional business. The only way for a transforming company is to learn like an elementary school student, with the courage to act and to fail. The key to immigrant thinking is keeping innovating in constant trial and error, and staying flexible until you discover your unique path. At some point in this journey of discovery, you are almost destined to walk into a dead end and have to backtrack or wander off at a fork in the road. But you must trust that every path is a blessing and it will lead you home. – Think like craftsmen. In the Middle Ages, before mass production, whether making saddles, shoes, purses, or candlesticks, craftsmen would engrave their initials on the product to show that it was unique because it was produced by them and imbued with all their efforts. Such products are sure to attract the most loyal users. Craftsmanship is to pour your feelings into your work, to be responsible for it, and to be proud of it.

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It is a bit ironic for Internet practitioners to talk about thinking like craftsmen, because one of the things Internet companies revere is speed. In a world where most people seek to be fast, is there a place for Kung Fu like Tai Chi, which is based on the principle of “slow make fast?” It is not uncommon to see managers who propose year-on-year goals and break such goals down to quarterly and monthly. It is inevitable that we will be worried: in the midst of reckless growth, is this not sowing the seeds of future failure? It is common to see companies emphasize that KPIs are above all. KPIs are a great tool and effective KPIs can serve as important signals as to whether the business is operating and achieving growth as planned. For example, we all know that measuring profits, revenues, and costs helps to identify whether the business has grown, shrunk, or simply stayed the same. To some extent, they also reveal important trends (such as changing cost or revenue patterns). But for the most part, these traditional metrics, as valuable as they are, are retrospective indicators that only provide insight into the past and do not reveal the future of the business. CEOs and CFOs who manage their businesses primarily based on financial statements may run a company successfully; however, without forward-looking metrics, they can only manage the entire lifeline through the rearview mirror. So, companies need forward-looking KPIs that provide more information about trends, issues, and roadblocks ahead. At the same time, companies must also embrace the spirit of implementing ideas deeply and thoroughly. This is also a kind of Internet spirit: identify the user’s pain point, and frantically solve this pain point completely, and only then we may reach some kind of explosive or leading effect. – Think like waiters. When Friedman and Mandelbaum, with whom he co-wrote the book, dined together in a restaurant, the waiter was so pleasant to talk with them that he decided to serve them with an extra fruit plate. Friedman tipped the waiter generously because he felt that the waiter met all the needs of the users had thought of and had not thought of. The waiter’s extra action on the spot depended on two things: first, the waiter had the right to decide whether to give the fruit plate or not; second, this on-the-spot behavior showed that the waiter had an

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entrepreneurial spirit, because he could decide in his own territory what to do with the user. Friedman says with great emotion that a waiter can think like an entrepreneur, making autonomous decisions and providing attentive service based on the customer’s emotions to make them happy. The entrepreneurial logic here is: all your decisions in this territory of yours are designed to make the user feel comfortable here, so that they tip you more willingly and will definitely come back next time. Thinking like waiters is the ultimate way to get and retain users. The Internet era is an era of consumer sovereignty, where the success of enterprises in such an economic environment will largely depend on good service capabilities and service awareness. Finally, Friedman concluded for personal development that our world is in transition toward a highly interconnected one, and the next job is not something you find, but you create. So it is essential to keep creating, to realize ideas through collaboration and innovation. Friedman said, “The time for average people is over, and average people get only average rewards.” This is a cruel statement. 1.3

The Era of Personal Globalization

We keep talking about globalization of countries and globalization of companies, but few actually realize that individuals are also globalizing. The biggest change in the era of personal globalization is that everything is moving in a horizontal direction. We are increasingly leaving a world where value is created by vertical command and control while moving into a world where value is created by connecting and collaborating with others horizontally. The world is transforming from vertical to horizontal, and we are on the eve of a sea change. Paul A. David, an economist at Stanford University, wrote an article on electricity that provides a commentary on Friedman’s statement. He asks the question: Why didn’t electricity immediately enhance human productivity when it appeared? He came to the conclusion that to achieve productivity gains by replacing steam engines with electric motors, one must first redesign the workshops, converting tall, multi-story buildings that accommodate steam engines and various pulleys into small, lowrise buildings that allow factories to run on electric motors. After that, managers had to change their management methods, and workers had to modify their production methods, with untold habits and structures

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having to be changed. Once these changes converge at a certain turning point, mankind will have a dramatic increase in productivity brought about by electricity.2 Friedman argues that today we are in the midst of a process as indicated by the change in electricity and are learning to change our habits and level ourselves out on a horizontal platform. As a result, your world will become more and more independent of the organization and benefit more and more from your personal connections. As far as enterprises are concerned, a profound contradiction that cannot be ignored today is that the evolution of enterprises is not keeping pace with the evolution of people. The only crack is to transform the enterprise into a gathering place for those people we want to work with.

2

Are Humans Selfless, or Selfish?---Reflections on The Penguin and the Leviathan Can entrepreneurs rethink human nature and instead change age-old practices that govern people through incentive structures - both rewards and punishments?

Has the pendulum finally swung to this side? For centuries, human society has operated according to an uncomplimentary understanding of human nature: humans are inherently selfish creatures, wherever they live. Economics has seen this matter most thoroughly, hence the so-called economic man (Homo economicus ) hypothesis, which sees people as selfconscious, materialistic creatures who always manage to maximize benefits through rational calculation. In fact, we all know that this is a caricature. However, in the “real world” supported by markets and politics, the “economic man” hypothesis works well enough in practice to convince us of it. After all, who hasn’t seen those disgusting, selfish, and greedy guys? The result is that the most entrenched social structures—the topdown business model, the punitive legal system, and the market-oriented approach to all matters (from education reform to environmental regulation)—are all built on the assumption “humans are selfish.” Such a social 2 Paul A. David. The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox. The American Economic Review, 1990, 80 (2): 355–361. http://www.dklevine.com/archive/refs4115.pdf.

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structure is based on the “golden rule” that “People die for money, birds die for food,” and the social perception that “Ask only about success or failure, not about right and wrong.” People are either manipulated by the invisible hand of the free market or by the iron fist of an oppressive government. However, over the past 20 years or so, the economic man model has finally shown its fatigue and a group of scholars has started to work on proposing a new paradigm to explain human society. Studies in hundreds of different cultures have shown that most people have a much higher capacity for cooperation than previously assumed. The myth of the “rational man” has been poked with many holes, although the new paradigm has yet to win mainstream recognition either among economists, politicians, or ordinary people. Harvard professor Yurcha Benkler tried to show solidarity for this in his book The Penguin and the Leviathan: How Cooperation Triumphs Over Self-Interest (2011). He wants to show how cooperation triumphs over self-interest. In this book, Benkler cites a series of new discoveries from neuroscience, economics, sociology, evolutionary biology, political science, and other disciplines and presents a number of real-life examples to disprove the proposition that “humans are selfish.” His goal is to argue that once humans know how to harness the power of cooperation, they can unlock unlimited potential to improve business processes, design smarter technology, reform our economic system, maximize voluntary contributions to science, reduce crime, enhance the effectiveness of civic movements, and the list goes on and on. The whole point of Benkler’s book is that the many scientific findings and countless Internet-based examples reveal that rather than being hopelessly self-serving and deviating from social morality, as economists imagine, human beings have an innate cooperative nature and can cooperate within their agreed-upon social structures, rather than unleashing never-ending competitions on each other. The “Leviathan” of the book’s title is a character written by Thomas Hobbes, who symbolizes the absolute authority to curb the “war of all against all.” Benkler writes optimistically that “Tux, the penguin mascot of Linux, is little by little dismantling the view of humanity preached by Thomas Hobbes in Leviathan.” That view of humanity is: people are selfish in a fundamental and universal sense. The only way to manage people is to establish a government and have it exercise control over them to prevent

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them from harming compatriots or making each other intolerably miserable in their blind pursuit of self-interest. At the same time, the penguin is also opposing Adam Smith’s alternative solution to human selfishness— the “invisible hand.” There is no doubt that the penguin represents the inherent selfless nature of human beings. What humans need to do is to design the right institutions and policies to carry this nature forward. Benkler’s previous book, The Wealth of Networks (2006), focused on a third cooperative effort that derived from the two traditional resource allocation models, the state-based model and the market-based model, which he called “commons-based peer production.” He describes fully this new model of socioeconomic production, where a substantial number of people collaborate through the Internet. In contrast to traditional business models, this model usually does not form a strict hierarchy or rely on proprietary knowledge; inputs and outputs are shared freely or conditionally in an institutionalized form, achieving equal access and autonomous choice among all. Often (not always), commons-based projects are also not required to provide financial compensation to contributors, as exemplified by Wikipedia, open-source software, and the blogosphere.3 The Wealth of Networks is a large, academically written work; The Penguin and the Leviathan, however, is uncharacteristically full of anecdotes, with minimal footnotes and not a single reference, and is more a popularized version of new scientific discoveries about human cooperation than a doctrinal deconstruction of the ideology of the free market and its cognitive premises. From Toyota’s management culture and Spain’s village-based autonomy to the autonomous pricing of records and the GNU/Linux digital gift economy, the examples in this book show that the viability of cooperation is becoming apparent on a large scale. So what is the underlying foundation on which cooperation operates? Genetics? Culture? Laws and public policies? Business organizations? Social norms? The real answer may be: all of these. Benkler begins by challenging, with evolutionary biology, Richard Dawkins’ masterpiece The Selfish Gene 4 and the claim that natural selection occurs only at the individual level, not at the collective level. He quotes Harvard biology professor Martin Nowak: “Perhaps the most striking point of evolution is its ability 3 Yurcha Benkler. The Wealth of Networks: How Social Production Transforms Markets and Freedom. Yale University Press. 2006. 4 Richard Dawkins. The Selfish Gene. Yunzhong Lu, et al. (trans.). Beijing: CITIC Press. 2012.

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to generate cooperation in the midst of a competitive world. In this way, it may be possible for us to add a third one: natural cooperation, in addition to the two basic evolutionary principles of mutation and natural selection.”5 Benkler goes on to discuss the psychological and social implications of cooperation, how enhanced communication leads to empathy and solidarity, and the importance of fairness and trust in successful commons management. How fairness is framed is also important; for example, we can accept winning the lottery for the lucky ones and high salaries for corporate executives, but we cannot tolerate queue jumping. Throughout The Penguin and the Leviathan, there is no single, overarching narrative; the author is more like a tour guide who takes us through a variegated landscape of human cooperation based on diverse scholarship and many archetypal systems. I was disappointed by the lack of coverage of the “Leviathan” in the book, despite the fact that the “Penguin” is discussed at length. The Leviathan, the state-based top-down system of command, control, and coercion, is a mere foil for the Penguin in the book. In The Wealth of Networks, Benkler has a lot to say about the political implications of the commons. I was hoping that by bringing in the metaphor of “Leviathan,” he would explore more deeply how state power might change in an era of digital networks and cooperation, but alas, I did not get to read that. However, the defects do not obscure the virtues. This book is the best introduction to what scholars have discovered about human cooperation in the last 20 years. This book has the best predictions for how cooperation will take hold of life in the twenty-first century. Let us hope that the argument that humans are capable of cooperating will become common knowledge in the minds of more people, especially politicians and economists. Likewise, can entrepreneurs rethink human nature and instead change age-old practices that govern people through incentive structures—both rewards and punishments?

5 Martin Nowak, Roger Highfield. Super Cooperators. Zhiyong Long, Wei Wei (trans.). Hangzhou: Zhejiang People’s Publishing House. 2013.

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3

To Nudge? Or Push Strongly? Or Simply Kick the Buddy?

In many cases, the weak human will may be irrational, yet that weak will is what makes human beings what they are.

Economics has been called the “dismal science,” as evidenced by its multiplier charts, gross domestic product (GDP) ratios, and marginal utility. However, in light of today’s economic situation, perhaps it should be better known as the “pseudo science.” That is, it looks fascinating, but in reality it is completely unable to predict the impending disaster. Still, the public can’t get enough of those economists, especially now, because the public is so desperate to know what is wrong with the world economy and how to get it back on track. So, not surprisingly, when Richard H. Thaler came out to speak, people listened—not to mention that Thaler was joined by Cass R. Sunstein, who is regarded as one of the most influential jurists in the United States. The two men have jointly published the book Nudge: Improving Decisions About Health, Wealth, and Happiness (2008), whose content is clear from its title: first, it is about the choices people make; second, it is about the choices people make to live healthier, wealthier, and happier lives. A big goal, isn’t it? Taylor and Sunstein are qualified to write such a book, having both graduated from the University of Chicago, the cradle of American economics, the birthplace of the “efficient market hypothesis,” and the motherland of the neoclassical economics that has ruled our world for decades. You must know the names of Milton Friedman and Gary Becker, right? They patiently taught us that we are all “economic men,” purely rational calculators, and that human thinking and choice is a very sophisticated act. Rational decisions made by self-interested individuals create efficient markets, so if the government would take its hands off free enterprise, capital would tend to be used in its most efficient way, and society as a whole would flourish. You may wonder why Taylor and Sunstein, who came after Friedman from the University of Chicago, did not follow in Friedman’s footsteps. At any rate, the university is the very heart of free market economics. On the contrary, in the terminology of popular economics, Taylor and Sunstein unleashed a “black swan”—they announced the demise of the traditional Chicago school. They are a new breed of economists who call themselves “behavioral economists.” In fact, one could argue that Taylor

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is the originator of behavioral economics, as Daniel Kahneman, the Nobel laureate in economics, credits Taylor with being the first to propose the incorporation of psychology into the discussion of economics and the derivation of behavioral economics as a discipline. Behavioral economics challenges the assumption of the “economic man,” which treats as a myth the rational “economic man” who buys and exchanges in a Friedmanian free market. In the opening pages of the book Nudge, the authors write, “If you look at economics textbooks, you will learn that homo economicus can think like Albert Einstein, store as much memory as IBM’s Big Blue, and exercise the willpower of Mahatma Gandhi. Really. But the folks that we know are not like that…”. We can often see that these ordinary people are too lazy to fill out those forms that will allow them to get their company pension, lolling on the couch while eating donuts and watching TV when they should be doing yoga, and even forgetting their loved ones’ birthdays. Those men and women in real life are inconsistent, ill-informed, and have poor willpower while inertia is strong. They are largely incapable of balancing the temptations of today with the rewards of tomorrow, and some of them do not even find instant gratification fast enough. In the words of two authors, “They are not economic men at all, they are social men.” In that case, shouldn’t laissez-faire policies be pronounced dead? Many behavioral economists do think so, and although neither Adam Smith nor Friedrich Hayek cited the existence of highly rational economic men as the cornerstone of laissez-faire, behavioral economists who oppose homo economicus are gaining more and more traction. Certainly, the worldwide financial crisis provides vivid proof of their theories. Even Alan Greenspan, former chairman of the Federal Reserve, has admitted that his Chicago School worldview has been shaken. It can be sneered that the financial crisis has become the best marketing tool for behavioral economics. How far has behavioral economics gained ground? Time revealed that the Obama campaign had a “dream team of behavioral economics,” including MIT’s Dan Ariely, author of Predictably Irrational: The Forces That Shape Our Decisions, Taylor and Sunstein from the University of Chicago, and Daniel Kahneman from Princeton University. These men gave the Obama campaign ideas on messaging, fundraising, rumor control, and voter mobilization, but little is known about their roles. Michael Moffo, a key conductor of the Obama campaign, marveled, “These guys really know what hits the mark.”

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This is perhaps what motivated Taylor and Sunstein to write Nudge: they wanted to help real, fallible people make better choices without taking away their right to choose. They call this “Libertarian Paternalism”: “In our understanding, a policy is ‘paternalistic’ if it tries to influence choices in a way that will make choosers better off, as judged by themselves…” At first glance, the term “Libertarian Paternalism” seems like a semantic contradiction, but Taylor and Sunstein insist that only with this set of ideas can people avoid making stupid decisions. They call this “Libertarian Paternalism” by one word—Nudge. “Nudge” is used to describe anything that can influence our choices. We all know that everyone has to make all kinds of choices every day, from which company to invest in, which school to choose for our children, to what to eat tonight, what causes to support, and so on. Unfortunately, we often make the wrong choices. The reason for this is that, as a social man, we are influenced by multiple biases. Taylor and Sunstein’s idea of nudging is to make people live healthier and happier lives through the design of more friendly choice environments and buildings. This requires the presence of a kind of people, which Taylor and Sunstein name “choice designers,” who seek to make people’s lives better by changing their behavior. In Taylor and Sunstein’s view, choice designers are everywhere. They cite an interesting example: in the men’s restroom at Schiphol Airport in Amsterdam, the Netherlands, a black fly is engraved on each urinal. Men always seem to struggle to find a target to aim at when they are taking a leak, so they get it all over the place at every turn, and once they find a target, they focus on that point, which improves accuracy and reduces splashing. The person who came up with this idea was an economist who presided over the expansion of Schiphol Airport. It turned out that the engraving on the urinals reduced splashing by 80%. Taylor and Sunstein thus concluded that apparently insignificant things can often have a significant impact on people’s behavior. A tried-andtrue rule of thumb is that “you have to stick to trifles even when you do the big things.” These trifles prove Taylor and Sunstein’s point that people’s behavior can be consciously changed by choice design rather than by directly imposing one’s will on others. This is the appeal of Libertarian Paternalism. However, we must acknowledge that the force and scope of such “nudge” are difficult to control. For example, when does a “nudge” become a “strong push”? When do the institutions and people concerned simply kick you hard with their

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iron-tipped shoes? Taylor and Sunstein’s Libertarian Paternalism may have anti-liberal elements, although they claim that “When we use the term libertarian to modify the word paternalism, we simply mean libertypreserving.” Perhaps the most honest description of Taylor and Sunstein’s path is that it is a relatively soft, moderate, and non-intrusive paternalism. Even this paternalism is not allowed to stretch its hand too far. In many cases, the weak human will may be irrational, yet that weak will is what makes human beings what they are.

4

Gamification and Cold War Thinking

The game is something created by the combination of new technologies driven by human needs.

Gamification is the application of game thinking and game mechanics to non-game scenarios in order to motivate people to solve problems and increase contributions from users. It takes advantage of the natural desires of all people, such as the desire for socialization, learning, proficiency, achievement, status, self-expression, and altruism, and transforms users into players by designing a reward for completing a task or a competition to beat an opponent and achieve something. The rewards here include points, achievement medals, upgrades, progress bars, and virtual currency, to name a few. These rewards must be fully visible to other players in order to add excitement to the competition—leaderboards are an often used technique. Another dimension of gamification is to take ways to make existing tasks more game-like in order to make them easier to complete. For example, providing more meaningful options, writing online tutorials for tasks, making tasks more challenging, enhancing the narrative of tasks, and so on. Gamification has been attempted across multiple domains, whether it is fitness, investing, education, entertainment, or for assessing candidates when hiring. It can be used for customer engagement and retention, to stimulate creativity and brainstorming, and to boost employee productivity. Data shows that more and more organizations and companies are using gamification strategies to organize their sales and innovation processes. Starbucks awards medals to those who patronize its cafes at multiple locations, while offering discounts to those who spend more at a single store. Health insurance companies are considering the possibility

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of rewarding healthful behavior if policyholders are willing to let their insurers evaluate their daily lifestyle in real time. Even future elections could be organized in a gamified way, with people earning rewards and game medals for going to partisan events, clicking on politicians’ web pages, and participating in interactive quizzes with politicians. The craziest idea is to organize a so-called voter lottery. Each voter received an election notice with a lottery ticket. After the results are calculated, TV stations will open the lottery with a jackpot of $10 million, “a drop in the ocean of costs for a national election,” but a powerful incentive for widespread election fatigue. In addition to the top prize, there can be a variety of special prizes rich in symbolism, such as inviting voters to visit the Capitol or the president’s residence, or simply awarding a surprise prize of a dinner with the president. 4.1

Gamified Management: Employees and Users

Managers are increasingly faced with tough tasks, problems, and challenges today. They need a fully engaged workforce, but Gallup reveals that global engagement levels may be as low as 15 percent.6 To change this, gamification is rapidly being integrated into our modern way of working, along with social media, to boost employee engagement. Because games can strongly engage players, managers are very happy to see the same engagement experience if it makes its way into the workplace. In 1914, when Henry Ford decided to implement the Five-Dollar Day program at Ford, he not only considered the workers’ work situation but also attempted to regulate their behavior in their spare time. He made it clear that in order to receive a higher salary, one had to lead a “neat, rational and industrious life.” He requires employees to demonstrate that they do not drink alcoholic beverages and do not abuse family members, in addition to regularly depositing money into savings accounts, keeping their homes clean, and possessing integrity. Ford mobilized a large group of investigators, at one point numbering 200, to implement his lifestyle rules. The investigators were asked to “call at least a dozen families a day to verify information about marital status, religion, nationality, savings, health, hobbies, life insurance and a variety of uncountable questions.” 6 Jim Harter. Dismal Employee Engagement Is a Sign of Global Mismanagement. Gallop blog. https://www.gallup.com/workplace/231668/dismal-employee-engagementsign-global-mismanagement.aspx. Dec. 13, 2017.

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To help them in their work, Ford provided each investigator with a brand new Model T, a driver and an interpreter needed for investigations in minority areas.7 This radical approach is arguably the forerunner of gamified employee motivation. The first company in the world to launch the banner of “gamified management” was Shanda Games at Shanghai. As a game company, Shanda Games pioneered the practice of building a corporate organization and performance management system around gamification in 2007. CEO Chen Tianqiao introduced the concept of “gamified management” with the core values of “humanity, fun and harmony,” complemented by organizational restructuring, information system construction, and performance system improvement. His slogan is: “To manage the company like a game, and to serve the staff like a user.” He pioneered the practice of assigning an experience value to all of Shanda’s employees like characters in a game. This innovation derived from a rather realistic inquiry: Why does Shanda Games, which has the ability to put a virtual community in order, always run into various problems when managing a real corporate community? Chen Tianqiao said that whenever it came time to decide on employee bonuses or promotions, as the leader of the company, he was in immense pain for fear of unfairness, and the experience value’s faithful record of employee performance relieved him of his worries. Perhaps the gamified management can be understood as a “computer version of Chen Tianqiao,” which is actually a kind of quantitative management. Through gamified management, we can see Chen Tianqiao’s efforts to make business management more participatory. The practice of gamified management was then promoted in various companies. Amazon, known for its monotonous and demanding warehouse work, has started to install screens next to workers’ work stations that are equipped with simple games in order to motivate them. The physical movements of workers—from packing to moving items after taking an order—are translated into the actions of the avatars in the virtual game. So the faster someone picks up items and puts them in the box, the faster their car travels around the virtual track in the game.8 These games

7 A Greatest Choices in Management History: Henry Ford Doubled Workers’ Wages. Fortune China. http://app.fortunechina.com/mobile/article/187540.htm. Dec. 12, 2013. 8 Greg Bensinger. “MissionRacer”: How Amazon Turned the Tedium of Warehouse Work into a Game. The Washington Post. https://www.washingtonpost.com/technology/ 2019/05/21/missionracer-how-amazon-turned-tedium-warehouse-work-into-game/. May 21, 2019.

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are designed to reduce the boredom of work and also encourage higher productivity by pitting workers against each other in a virtual game world (if Taylor is lucky enough to be resurrected, he will probably be surprised by this method). This gamified management technique of transforming work into a possible game is a strategy often employed by companies to boost engagement with a product or service. For example, ride sharing apps such as Uber and Lyft regularly set goals for drivers, such as completing a certain number of drives in a week, to encourage drivers to increase their service hours.9 In a similar fashion, game elements can also be employed to increase user engagement. For example, Nike operates one of the world’s preeminent gamification products with its series of apps. It takes advantage of people’s natural competitive spirit. The Nike Run Club app’s personalized guidance and motivation comprehensively cover running-related needs, helping runners run more and better. The 185 free training contents in the Nike Training Club app, together with the comprehensive advice on healthy life and sports, help users achieve the ideal training results. In terms of game elements, Nike’s running app encourages runners to train as seriously as they do in a race, marking their routes, tracking their progress, recording distance, speed, time, and calories burned, thus inspiring them to run further and break their own records. Not only that, the running app also connects with social media to encourage personalized sharing after the run: personalize your post by adding photos, running data, and postings, with the option to share to friends or sync to other social platforms. In this way, runners can compete with (or show off to) their friends. It is all about engaging more people, which ultimately drives Nike’s sales. Why are so many companies gravitating toward gamification tactics? Quite simply, gamification triggers the emotions associated with a positive employee/user experience. These authentic and contagious human emotions, whether it is the happiness of achieving a goal or the excitement of overcoming a complex challenge, can lead to higher engagement, loyalty, and better performance. So we see gamified management

9 James Vincent. Amazon Turns Warehouse Tasks into Video Games to Make Work “Fun”. The Verge. https://www.theverge.com/2019/5/22/18635272/amazon-wareho use-working-conditions-gamification-video-games. May 22, 2019.

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blossoming on all sides: it is widely used for processes, learning, crowdsourcing, employee assessments, testing of the ease of use of tools or devices, and the usefulness of systems. 4.2

To Resist the Digital Self

The implementation of gamification does not come without a price. Arbitrary goals and rewards are psychologically powerful, can make hard tasks seem meaningful and engaging, and can be used to shape behavior. Go too far, however, and they become just another type of work, only with the trappings of a game, and all the more depressing because of this disguise. Game-like competition is only enjoyable in the short term; once workers begin to underperform their colleagues, the game becomes less interesting and actually counterproductive. Any game is played within a fixed space and time frame, and its rules, while freely accepted by the players, are absolutely binding, making it a great challenge to maintain a balance between tension and enjoyment. The German scholar Frank Schirrmacher argues in his book Ego: The Game of Life that the essence of gamification is the transformation of the whole of life into a permanent game of badges, rewards, and incentives. Why this tendency? Schirrmacher attributes it to Cold War thinking: the great thinkers of the Cold War claimed that when in a choice situation, people were simply playing games. Based on this theory, they succeeded in reducing human rationality to a single motivation—self-interest. Only when everything is a game, played according to the various rules of the egoist, can calculations be made about people, about the world around them, using precise mathematical formulas.10 Frank Schirmacher’s book reads like a constant warning that the cultural values of the traditional Europe are being undermined by Silicon Valley and Wall Street. Human relations in the post-Cold War era have been shattered into a series of equations and game-theoretic scenarios, and capitalism has developed into an infinite marketplace of information. In an information capitalist society, every citizen is a consumer. In this uncontrolled information age, the profound question that humans are forever asking—”Who am I?”—is increasingly influenced by the digital 10 Frank Schirrmacher. Ego: The Game of Life. Tan Lin (trans.). Beijing: China Machine Press. 2014.

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world. The digital self has in many places replaced the real self, which increasingly feels powerless because he does not understand how the former is generated. Thus, it is necessary to initiate a digital civil resistance to prevent the citizen from being controlled by the digital self.

5

Chinese Wisdom in the Quantum World

The two major “thinking structures” of human interpretation of the world the Western emphasis on “cause and effect” and the Chinese advocacy of “yin and yang.”

Margaret J. Wheatley’s Leadership and the New Science: Discovering Order in a Chaotic World (2006) is an interesting book. In fact, Wheatley uses the New Science as a metaphor to question the way the West has perceived the real world since Isaac Newton and René Descartes, such as viewing the world as a large inanimate machine; commodifying individual workers; overemphasizing scientific objectivity and scientific management; and so on. The author’s preface clearly shows the influence of Eastern culture on her leadership and organizational studies. The author says that the new ideas about leadership that originated in the “New Science” are “not new at all. They are new only for Western societies.” Recognizing the antiquity of the New Science means bringing back relationships, traditional beliefs, community, and harmony to a modern, mechanical, technology-driven world; it means creating new solutions to chaotic realities through wisdom and cooperation rather than the brute force of the past; it means firmly establishing the understanding that it is cooperation that makes life flourish, never competition; it means understanding the need for chaos as opposed to order necessity—that chaos is not a bad thing, either within life or in an organization, but a necessary way to establish order. You may ask: How can quantum physics, living systems, and chaos theory have anything to do with ancient Chinese culture? The reason is precisely that the “new science” breaks with the inherent Western tendency of “mechanism,” which is accustomed to exploring structures from the perspective of elements and emphasizes the study of mechanical connections between different entities; instead, the “new science” alludes to the simple Chinese tendency of “systemism,” which analyzes elements

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from the perspective of structures and focuses on the functional relationships in the overall structure. Wheatley says: “One of the major differences between the new science and Newtonian science is that the former is concerned with the whole, while the latter emphasizes the parts.” And again, “In the quantum world, relationships are the key element that determines everything.” So it seems that the new science of the West is precisely our old philosophy in China, isn’t it? Observe the two major “thinking structures” of human interpretation of the world—the Western emphasis on “cause and effect” and the Chinese advocacy of “yin and yang.” “Cause” and “effect” are two relatively independent elements of each other. The “cause” does not depend on the “effect”; once the “effect” is produced by the “cause,” it also has the property of independence. The former constrains and influences the latter in an external, diachronic, and unidirectional way. In the view of the Chinese, who emphasize the relationship between “yin and yang,” “yin” and “yang” constitute and are subordinated to a unified contradictory structure. “Yin” cannot exist alone without “yang,” and “yang” loses its own meaning without “yin.” The constraints and influences between the two are intrinsic, synchronic, and bidirectional. By following the trail of thinking that there must be a cause, Westerners are forced to identify an original creator for the sensual reality of the world. Thus, in Newtonian science, the world is seen as a machine that began to operate by the “first impetus of God.” It is a closed system that is bound to increase in entropy, and in order to reverse the process of decay, it must constantly fight for survival. Out of a strong preference for causality, in management, the West first breaks things down into parts for astute prediction and control. The manager identifies these parts as being in endless conflict, and with dreams of control, they think they have the power to drive the chaos out of their lives. In contrast, the “yin and yang” thinking sees the world not as a machine but as life. In the world of life, what matters is not control, but dynamic connection. Nothing can exist on its own, even chaos and destruction are part of the cycle of life. Organizations are also living systems, with the ability to adapt and grow that all life has. As such, attention needs to be paid to the people in the organization, including their intentions, dignity, sentiments, and values, as these are essential to strengthening relationships. I must make it clear, however, that I do not intend to repeat the clichés on management and leadership that Chinese culture was and still

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is so wonderful today that it can cure the persistent diseases from which the West suffers. This argument does no good to the Chinese. As the author of the Leadership and the New Science sincerely points out in the preface, relationship-oriented societies do not easily innovate, and, because of late modernization, we are doing the opposite when the new science of Western societies has given up on telling how to control nature and started to explore how to live in harmony with it. The point I want to make here is simply that for Westerners, understanding the world from a holistic perspective is a new skill that has always been included in our Chinese innate wisdom, and we do not really need to look farther than we can see. The ancient Sufi teaching says, “You think, you know one, so you must know two, as one plus one equals two. But you must also know the ‘plus.’ “ Since when did we forget the Chinese “plus”?

6 Collaboration Changes the World---Preface to the Wikinomics The Wikinomics is nothing else but about mastering the art and science of harnessing collaboration for greater competitiveness.

“There has probably never been a more exciting and dangerous time in business than today. Stability is gone. The idea of creating a business that will never be disrupted by technology does not work anymore.” In the Wikinomics: How Mass Collaboration Changes Everything, Don Tapscott and Anthony D. Williams give entrepreneurs a sharp warning.11 In their view, the most disruptive technology today is mass collaboration, and the authors cite the popularity of Wiki software (a type of software that enables users to edit Web content) on the Internet, naming the resulting economy of “input and co-creation” the “Wikinomics.” In the Wikinomics, “the losers create web pages, while the winners create vibrant communities. The losers create a walled garden, while the winners create a communal place. The losers innovate within their companies, while the winners innovate with their users. The losers carefully

11 Don Tapscott, Anthony D. Wikinomics: How Mass Collaboration Changes Everything. Fan He, et al. (trans.). Beijing: China Youth Publishing House. 2007.

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guard their data and software interfaces against theft, while the winners share their resources with everyone.” The authors open with a story that borders on a modern-day pie-inthe-sky. Rob McEwen, CEO of Toronto-based Goldcorp Inc., struggled to find a gold mine and, guided by the success story of Linux’s opensource code, decided to make the company’s geological data public and ask the world for help. He launched the “Goldcorp Challenge” online, which offered a prize of $575,000 to the contestant who could come up with the best estimate and best solution. As a result, the contestants found 110 targets on the company’s mineral deposits, 50% of which were previously undiscovered by the company. More than 80% of the new targets were later confirmed to indeed contain significant amounts of gold, totaling 8 million ounces.12 The success of McOwen’s thinking was that he realized that the people qualified to make new discoveries might be outside his organization. By sharing some of its intellectual assets, the company was able to harness the power of its collective intelligence and genius. These groups of intelligent and talented people are changing the way we do business. They are producing television news, analyzing human genes, remixing favorite music, designing software, finding cures for diseases, editing school textbooks, inventing new cosmetics, and even building airplanes. The Wikinomics, based on mass collaboration, has produced many amazing business legends: – When P&G began launching its new Pringles chips, it found that it was a complicated task to put distinctive designs on tens of thousands of chips per minute. In the past, P&G might have devoted significant internal resources to this. But after mobilizing its global network, a solution suddenly emerged in Bologna, Italy, where a university professor had created a method for “inkjetting” on cakes and cookies. P&G quickly purchased the technology and made it work for its own requirements. – GeekSquad, a service company owned by consumer electronics giant Best Buy, has enjoyed phenomenal growth thanks to an open management model. It empowers employees to run the

12 1 ounce = 28.350 grams.

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company, design products through online collaboration, and sometimes communicate business through computer games. – The 787 Dreamliner, built by Boeing, marks a risk-sharing/benefitsharing global partnership involving more than 100 suppliers from six different countries. The company abandoned its traditional role as an aircraft manufacturer and became a “large-scale supply chain integrator,” integrating a diversified and globally dispersed team of designers and manufacturers into a highly complex and wellorganized system. Based on these examples, the two authors summarize seven models of large-scale collaborative economies. Ideagoras, for example, are a new marketplace for ideas, innovations, and unique geniuses, where companies act as resource seekers and can post anonymously on sites like InnoCentive the challenges they encounter in their R&D processes, and scientists around the world can submit their solutions and get paid for them through a bidding process. Thirty-five of the Fortune 500 companies have expanded their problem-solving capabilities through InnoCentive. Another model, “Prosumption,” means that consumers are actively and consistently involved in the creation of products, and companies that know how to tap into consumer insights will gain a competitive advantage. Regardless of the models, a key guiding principle is to go outside the company for strategic direction and great ideas. Mobilizing the online community to contribute its thinking and knowledge is a must. The Wikinomics is nothing else but about mastering the art and science of harnessing collaboration for greater competitiveness, and is a metaphor for a new era of collaboration and engagement that, as Bob Dylan sang, “Will soon shake your windows and rattle your walls.” For those familiar with YouTube, Facebook, and Wikipedia, the socalled Wikinomics may not offer much in the way of heartshaking. However, if you’re not sure what large-scale collaboration might bring to business and society, then you should read this book by Tapscott and Williams, for both career and personal life reasons. The authors propose to corporate executives that every company CEO or senior executive should start a blog, post on forums, participate in online polls, and experience the Internet community first-hand to find ways to respond to the change

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and lead the company to adapt to the trend. In terms of specific management, they should also focus more on harnessing the potential of each employee. The only shortcoming of this book is perhaps the lack of a little skepticism. Indeed, just as bad money drives out good money, in the online information market, it is highly likely that free information will swamp paid information, and that cheap bits will beat expensive bits. Moreover, while the wisdom of crowds is certainly amazing, the stupidity of crowds often leads to great mistakes. Despite this flaw, the two authors capture the economic trend toward mass collaboration quite accurately, reminding people of the attitudes they should have when participating in such a collaborative process. As noted blogger and science fiction writer Cory Doctorow put it, “Blacksmiths weeping into their beer about their inability to sell horseshoes in the era of railroads doesn’t make horseshoes more popular. Blacksmiths learning how to become auto mechanics, on the other hand, puts food on their table.”13 Looking outward, not just inward, would be a great leap forward in management thinking. Perhaps we can recognize it as the biggest leap forward since General Motors invented the company concept in the early twentieth century.

7

The Longitude and Latitude of Our World Crowdsourcing reveals a fundamental truth about human beings communities are more effective at organizing people than companies, because the best candidate for a job is the person who wants it most.

7.1

The Mystery of Longitude That Determines Maritime Supremacy

Mark Twain’s Life on the Mississippi (1883) writes, “When I am playful I use the meridians of longitude and parallels of latitude for a seine, and drag the Atlantic Ocean for whales!”14 From the writer’s imagination, we can feel the authority of these longitude and latitude lines ruling the 13 Don Tapscott, Anthony D. Williams. Wikinomics: How Mass Collaboration Changes Everything. Portfolio. 2008. 286. 14 Mark Twain. Life on the Mississippi. Introduction by Justin Kaplan, Afterword by John Seelye. Signet. 2009. Chapter 3.

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world: no matter how the pattern of the world below them changes, these lines do not move at all. Everyone with a little geographic knowledge knows that the lines of latitude are a series of concentric circles around the surface of the earth, from the equator to the poles, with the radius of these circles becoming progressively smaller; while the lines of longitude are semicircles of equal size that intersect at the two poles of the earth. The lines of latitude and longitude form the scale of the planet we inhabit, but there is a real core difference between the lines of longitude and the lines of latitude. Latitude is determined by the laws of nature, and determining latitude is as simple as playing a game: any competent sailor can measure latitude from the length of day and the altitude of the sun or a familiar star. In contrast, determining longitude, especially at sea, was the most irritating scientific problem of the eighteenth century, one that had defeated some of the brightest minds in human history. Astronomers such as Galileo Galilei, Jean Dominique Cassini, Christiaan Huygens, Newton, and Edmond Haley all tried to solve the longitude problem by turning to the moon and stars. Large observatories were built in Paris, London, and Berlin to determine longitude through astronomical observations. Why was the determination of longitude so important? Because it was a matter of life and death for navigators. Without longitude determined, even the best sailors would be lost if they could not see land. Even the greatest captains could not escape this fate, whether Vasco da Gama, Vasco Nunezde Balboa, Ferdinand Magelan, or Sir Francis Drake, the “destination” they reached was not of their will, but more due to the blessing of God. Once land disappeared from the horizon, mariners were left to navigate from start to finish, and ships were wrecked in large numbers due to the inability to know longitude. Before seafarers were able to determine longitude, history has recorded page after page of deaths at sea. In addition to reefing, long voyages, which became longer because longitude was not known, could also claim the lives of seafarers. For example, they would suffer from scurvy due to a chronic lack of fresh vegetables and fruits, or a ship could not find an island with freshwater, forcing the crew to die of thirst before reaching land. Samuel Pepys, a famous British diarist who witnessed these tragic conditions and served as a civilian officer in the Royal Navy, wrote: “It was a pure fluke that there were no more tragedies or misfortunes on the voyage, thanks to God’s

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grace, luck, and the vastness of the sea. After all, it is more likely that one will not hit the reef than that one will.” Longitude is not only a matter of the lives of thousands of seafarers, but also a matter of economics. In the age of geographical discovery, the wealth of European nations floating on the sea was seen day by day, and with unknown longitude, the economy suffered greatly. Since navigation can only be based on latitude, ocean-going ships converge on a few narrow but safe shipping lanes, where whalers, merchant ships, warships, and pirate ships jostled and wrestled with each other in the busy lanes. This explains why European monarchs have played a role in the story of longitude, notably King George III of England and King Louis XIV of France. King Louis XIV of France is said to have complained, in front of a map revised on the basis of precise longitude measurements, that he lost more territory to his astronomers than to his enemies. Given the critical nature of longitude determination, in 1714, the British government offered a reward of 20,000 pounds (equivalent to millions of dollars today) for a practical and workable method of determining longitude. The term “longitude determination” soon became synonymous with “trying to do the impossible.” In Gulliver’s Travels (1726), the good captain Gulliver is told to imagine himself as a man who lives forever, and he then expects to have the chance to witness the return of comets, the transformation of raging rivers into streams, and “the determination of longitude, perpetual motion, universal medicine, and other wonderful inventions.”15 Little did anyone know that the eventual laureate would be John Harrison, an uneducated and unknown watchmaker from Yorkshire. The lowly but highly intelligent Harrison was unique in boldly imagining a mechanical solution to the problem— a precise timekeeping device that would bring real time from the port where the ship departed to any distant corner of the world. The logic behind this approach is that the measurement of longitude is correlated with time. To determine longitude at sea, one must know not only the time on the ship, but also the time in the port of departure or other location with known longitude, and the two clock times allow the navigator to convert the difference in time into geographic distance. Given that the Earth rotates 360 degrees in one revolution in 24 hours and can turn 1/24th of a revolution every hour, i.e., 15 degrees, each

15 Jonathan Swift. Gulliver’s Travels. Penguin. 2003. 194.

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hour of time difference between the ship and the target location indicates that the ship has sailed 15 degrees of longitude distance either east or west. Harrison accomplished what I fear even Newton could not. His legendary journey to invent nautical longitude measurements is fascinatingly described in Dava Sobel’s Longitude: The True Story of a Lone Genius Who Solved the Greatest Scientific Problem of His Time.16 Some historians believe that Harrison’s work accelerated Britain’s control of the seas and thus the hegemony of the British Empire. 7.2

Where to Buy the Coolest T-Shirts?

Jeff Howe first coined the term “crowdsourcing” in a June 2006 article in Wired magazine, announcing the birth of a new business model—one that began as outsourcing and then open-sourcing and now crowdsourcing.17 Crowdsourcing refers to outsourcing work traditionally done by internal employees or external contractors to a large, undefined group of people. This work can be developing a new technology, completing a design task, improving an algorithm, or analyzing massive amounts of data, to name a few. This statement is novel, but similar practices have existed since the eighteenth century. As mentioned earlier, the British government offered public rewards for solving longitude problems. Early versions of the Oxford English Dictionary were also crowdsourced—thousands of volunteers submitted entries on slips of paper, which were compiled into a dictionary.18 This shows that humans understood early on that it is possible to gather ideas and realize that by pooling the wisdom of a group and taking in a wide range of useful opinions, they can break down barriers and achieve extraordinary things. A mountain makes its greatness for never overlooking even a grain of soil, and a river or sea

16 Dava Sobel. Longitude: The True Story of a Lone Genius Who Solved the Greatest

Scientific Problem of His Time. Fourth Estate. 1995. 17 Jeff Howe. The Rise of Crowdsourcing. Wired. https://www.wired.com/2006/06/ crowds/. June 1, 2006. 18 Simon Winchester. The Professor and the Madman: a Tale of Murder, Insanity, and the Making of the Oxford English Dictionary. Xiang Jing (trans.). Taipei. Linking Publishing. 2017.

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makes its deepness for never detesting a small stream. The philosophy of crowdsourcing is not new to us. However, in an era of lack of tools and means, the process of “gathering ideas” was difficult and painful. What brought the practice of crowdsourcing to new heights, to the point of becoming a new business model, was the emergence of the Internet, which made it possible to seek business wisdom and inspiration from the masses. In the spring of 2007, the cable station Current TV became involved in advertising creativity, encouraging subscribers to respond to solicitations to complete commercials. The station gets most of its programming from user-produced content. It has created a social network where viewers can create and upload 15-minute clips, post comments on others’ work, and vote on which works should be broadcast. One of L’Oréal’s gorgeous image ads, “Confidence to find your own color,” came from one of the viewers, and L’Oréal only paid the creator $1000 for the ad. If L’Oréal had produced it itself, it would have cost $164,200.19 The stories go on and on… Getty Images spent $50 million to acquire iStockphoto, a site where more than 23,000 photographers have uploaded their work, revolutionizing the tradition of stock images. Threadless.com prints and sells T-shirts designed by the site’s users. “The Second Life” virtual world allows users to create and retain intellectual property about new businesses, brands, and personalities; Fluevog, an open-source footwear site, invites enthusiasts to submit designs for new shoes and appraises the designs; Ducati Motorcycles customers can design new motorcycles through the company’s website20 ; Lego Inc. launched a new concept called “LEGO Factory,” which allows users to download a three-dimensional LEGO toy assembly software, design their own models, and then upload their designs to LEGO’s website, legoshop.com, for purchase.21 Of particular interest here is Threadless.com, an online T-shirt vendor. Threadless was founded in 2000 by Jake Nickel and Jacob DeHart, both 19 Paul Whitla. Crowdsourcing and Its Application in Marketing Activities. Contempo-

rary Management Research. 2009. 5 (1): 15–28. 20 Hempel J. Crowdsourcing: Milk the Masses for Inspiration. Business Week. Sep. 25, 2006. 38–39. 21 Albert Meige. Open Innovation, Crowdsourcing and the Rebirth of LEGO. https://open-organization.com/en/2010/04/01/open-innovation-rowdsourcing-andthe-rebirth-of-lego/. Apr. 1, 2010.

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active participants in the Chicago-based online community Dreamless, which is home to a wide range of clothing designers. The idea for a Tshirt design community was born when Jack Nickel won a T-shirt design contest sponsored by Dreamless. The Dreamless organizers admit that they were amazed by the number and quality of T-shirt designs received by the community. Threadless is all about providing a platform for upand-coming designers to showcase their design inspirations while helping them overcome their shortcomings. Both professional designers and amateurs can submit design ideas for new T-shirts, and the community polls these designs and customers’ willingness to buy them (usually on a scale of 0–5). Through this information platform, Threadless is able to select 6–10 new design proposals for one of these products each week. The winner receives a total of $2500 in cash and prizes and, more critically, recognition for their design talent, with the designer’s name printed on the label of each T-shirt, and the winning T-shirts worn and photographed by community members and included in the online product list. Members can also provide criticism and suggestions on these designs and give feedback to the designers.22 Threadless has become an example for a win–win business and community model. Nearly 10 years after its founding, the company sells up to 100,000 T-shirts a month, has customers around the world, and has 1 million registered users. Threadless receives 150–200 original designs every day, and each week the top 9 designs go into production.23 More than 1000 new registered users discuss design and art every day, and submit accompanying music and videos inspired by the designs. All this does not rely on traditional advertising and promotion, nor on sales by large retailers in their stores around the world.24 It is a remarkable business model: Threadless invites its customers to design, choose their own production lines, determine production volumes, and take care of marketing, promotion, and sales. Production

22 Frank T. Piller. Open Innovation with Customers: Crowdsourcing and Co-creation at Threadless. SSRN Electronic Journal. https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=1688018. Oct. 7, 2010. 23 Brian Caulfield. Why Crowdsourcing Isn’t for Everyone. Forbes. https://www.for bes.com/2009/04/03/threadless-crowdsourcing-internet-technology-inter-net-threadless. html#786df2d278a4. Apr. 3, 2009. 24 Karim R. Lakhani, Jill A. Panetta. The Principles of Distributed Innovation. Innovations: Technology, Governance, Globalization. MIT Press. 2007. 97–112.

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is, of course, outsourced, and all Threadless has to do is maintain the website. This means very low marketing risk and operating costs. The customer community takes on the core functions of innovation, new product development, sales forecasting, and marketing. 7.3

Communities Are More Effective Than Companies

Only 1% of users in the YouTube, and any possible social network, are active content creators, another 10% interact with the content and make changes, and the remaining 89% are passive observers.25 So the key to crowdsourcing is that savvy companies are committed to engaging the educated group with the most complex business problems in order to maximize the impact of a small group of thoughtful people. Consider InnoCentive, an open innovation and crowdsourcing platform initially created by Eli Lilly and Company and later developed by the platform itself, which puts organizations’ unsolved problems and unmet needs (called “challenges” on the platform) on public display, seeking distributed knowledge and access to solutions. Large companies like P&G and Boeing can also pay to leverage external forces to tackle tough problems they can’t solve internally. And individuals who solve the problem (retired scientists, amateurs, college students, etc.) will receive a generous cash prize. There is no need for sophisticated theoretical explanations, the products made by crowdsourcing have the potential to rival the best products created by the world’s best companies. Crowdsourcing is profoundly influencing the business models of the Fortune 100 companies. P&G, for example, requires that half of each division’s business or service innovations come from outside rather than from within26 ; IBM invested $1 billion in crowdsourcing because it discovered that much of the infrastructure of the information economy, from the Linux operating system

25 Hempel J. Crowdsourcing: Milk the Masses for Inspiration. Business Week. Sep. 25, 2006. 38–39. 26 Larry Huston, Nabil Sakkab. Connect and Develop: Inside Procter & Gamble’s New Model for Innovation. Harvard Business Review. https://hbr.org/2006/03/con nect-and-develop-inside-procter-gambles-new-model-for-innovation. Mar. 2006.

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to Apache server software to Firefox, was built by self-organized teams of volunteers.27 Insulated from the outside world, the companies once thought they had all the answers. This was the case for quite some time with P&G, which saw itself as a pioneer in innovation, leading the consumer goods industry for more than a century. Yet its innovation success rate— measured by how many new products have met financial targets—is only 15 percent.28 P&G recognizes that in the past, slow-changing markets encouraged companies to be internally oriented and vertically integrated; but today, the disappearance of geographic boundaries, the collapse of barriers to competition, and cost pressures on a global scale are forcing companies to open up. Now, P&G is committed to collaborating with anyone, anywhere, anytime. In the case of crowdsourcing, today’s organizations have to evolve from a purely hierarchical system to a networked one. The organizational model of the post-industrial era is one of the virtual networks that cross traditional business boundaries. By network, we do not mean a network at the technical level, but rather a network of social relationships along the enterprise value chain. There is a historical evolution of such networks. Ronald H. Coase argued that enterprises exist to achieve economy of market transactions. According to this view, efficiency is the primary motivation for setting up a firm. However, as collaborative technologies systematically reduce the cost of interaction within and outside the firm, the fundamental reason for the enterprise’s existence is changing. The first step in the evolution of the enterprise within the network is to gradually go outside to generate value. That is, to step outside the traditional boundaries of the organization and interface with the specialized capabilities of other companies to enhance their own product innovation and business model innovation. The second step in the evolution of the network is through social technologies that enable individuals in the social network to collaborate freely. These social technologies are associated with a high degree of consumer interaction. In this context, companies 27 Yochai Benkler. Peer Production and Cooperation. In Johannes M Bauer, Michael Latzer (eds.) Handbook on the Economics of the Internet. Edward Elgar Publishing. 2016. Chapter 5, 91–119. 28 Bruce Brown, Scott D. Anthony. How P&G Tripled Its Innovation Success Rate. Harvard Business Review. https://hbr.org/2011/06/how-pg-tripled-its-innovation-suc cess-rate. June 2011.

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must create new roles for themselves and learn new ways of operating or they will not survive. Many companies want to adopt the new business model of crowdsourcing, but they tend to make the mistake of rushing to build a community of consumers without carefully considering what they want and planning how to achieve it. As a result, it is easy for the “masses” to submit low-level proposals. How to sift wisdom from a mingling of good and bad? The following practices are critical. Focus: Vaguely defined questions only get vague answers. Current TV specifies that viewers create advertising content for the purpose of airing new ads online as well as on cable networks. This approach allows companies like L’Oreal or Sony to tap into fresh ideas in viewer-created ads. Make the right filter: In July 2007, IBM launched an improvised Innovation Jam to tap into the collective intelligence of employees, their families and customers to expand the field of innovation. IBM identified four main themes, provided interactive background information for each, and used facilitators to keep the conversations on topic. Ultimately, the company collected 37,000 ideas, which were screened by employees. 140,000 people participated in the first phase online, and the company’s CEO, Sam Palmisano, joined the final selection and planned to invest $100 million in promising ideas.29 Choose the right group: The group can be either external sources (such as the network of more than 380,000 problem solvers on InnoCentive) or internal sources (i.e., the organization’s employees, partners, or customers).30 InnoCentive relies on a group of talented scientists with highly specialized skills and recruits young and bright talent at universities (this site also has agreements with several Chinese universities) who can bring great ideas to the table. And IBM’s Innovation Buzz is geared internally. Of interest is user innovation, where, as The Economist puts it, “The customer is not only king, but now also serves as head of market research, head of R&D and product development manager.”31 29 Hempel J. Crowdsourcing: Milk the Masses for Inspiration. Business Week. Sep. 25, 2006. 38–39. 30 Premium Challenges. InnoCentive. https://www.innocentive.com/offering-overview-old/premium-challenges/. 31 The Rise of the Creative Consumer. The Economist. https://www.economist.com/ business/2005/03/10/therise-of-the-creative-consumer. Mar. 10, 2005. Available at Eric

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Build communities into social networks: Money can inspire participation, but successful crowdsourcing relies on igniting everyone’s passion. Cambrian House, a software company founded by Michael Sikorsky, runs entirely on crowdsourcing. Everyone who contributes an idea receives patent right points, enjoys an interest in the product, and eventually gets cashed in. Sikorsky says, “One of the big reasons people are committed over time is that they build friendships with each other, just as on eBay, where buyers and sellers haggle and comment with each other, and these interactions foster trust and keep them active in the community.”32 Crowdsourcing reveals a fundamental truth about human beings— communities are more effective at organizing workers than companies, because the best candidate for a job is the person who wants it most. Passionate, happy people make up the warp and woof of our world, and crowdsourcing is about harnessing the wisdom of the group to create beautiful things that benefit everyone. It is important to note that crowdsourcing does not just mean for the crowd; it means for the individual as well. Michel de Montaigne, a French philosopher of the seventeenth century, wrote: “There never were, in the world, two opinions alike, no more than two hairs, or two grains; the most universal quality is diversity.”33 What Montaigne meant was that the only thing we have in common is that we are all different. In the age of the Internet, that is a great thing. In Harrison’s story, a scientific mystery that determined the rise and fall of hegemony was solved by an individual, another reminder of the marvelous role of the individual in history; and today, with new tools and connections like never before, the role of the individual is at a new level than it has ever been before.

8

Employees Are Always Smarter Than Bosses Executives are no longer developing a strategy that seems to work over the long term, but instead empowering employees to match their abilities and interests to the market.

von Hippel. Democratizing Innovation. The MIT Press. 2005. 32 Hempel J. Crowdsourcing: Milk the Masses for Inspiration. Business Week. Sep. 25, 2006. 38–39. 33 Hugo Friedrich. Montaigne. Philippe Desan (ed. & intro.), Dawn Eng (trans.). University of California Press. 1991. 139.

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This is not a deliberate move against the grain, but a necessary one in an era of big innovation explosions.

Richard S. Tedrow, who taught corporate history at Harvard Business School, wrote his last book before joining Apple to lead Apple University, titled Denial: Why Business Leaders Fail to Look Facts in the Face-and What to Do About It (2010). In this book, Tedrow cites the successes and failures of 10 world-class companies to illustrate the point that leaders’ “self-deception” is a trap for companies on their way. Tedrow borrowed Sigmund Freud’s work on “consciousness and unconsciousness” to explain self-deception. Self-deception is the refusal to identify and acknowledge the reality that threatens you. It is a conscious unconscious activity: “Sometimes we draw certain information out of the range of perception because it is too painful or stressful. This self-deception is like a narcotic. The more common reason is that the unpleasant information contradicts the assumptions that make us feel comfortable, and it is easier to reject them than to change our assumptions.” Psychoanalysis has remained out of the scientific realm for a long time because it cannot be falsified. In other words, Tedrow’s explanation of the phenomenon of “self-deception” is set at the psychological level, which means that it is the ultimate problem. Unless you take the initiative to change your mind, you will definitely encounter the black hole of “selfdeception.” It is an eternal truth that the essence of business is entrepreneurship. But the behavior of individuals cannot be accurately predicted, so solving the problem of “self-deception” seems impossible. Genius CEOs like Andy Grove have said that every organization should have a Cassandra. Cassandra was a prophet in Greek mythology who accurately predicted the destruction of Troy. Grove believes that there should be such a prophet in the middle management of the organization, because the middle management is more sensitive to the winds of the market than the top management.34 One way to avoid self-deception is for the top to listen diligently to the voices from the middle management or even the grassroots.

34 Richard S. Tedrow. Andy Grove: The Life and Times of an American Business Icon. Portfolio. 2006. 271–272.

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However, this approach is based on the contingency of a manager’s unique mind and cannot be developed into a methodology. Some CEOs listen, some do not at all, like Henry Ford, who fired his brother-in-law for having the courage to advise him. According to Tedrow’s analysis, it is likely that the CEO’s personal psychiatrist will be the one to save the company in the end. Obviously, this is not feasible. In fact, Drucker had already given the answer in the 1940s. In his Concept of the Corporation (1946), he made the insightful statement, “The basis of mass production is not the assembly line, the conveyor belt, or other things such as mechanical devices or technology, but the conscious, planned and ordered relationship between people and people and between people and mechanical processes.”35 This is his precise explanation of the concept of “human organization.” The Concept of the Corporation is based on Drucker’s observations of General Motors. In this book, he positioned “management” at the level of “organization”; that is, management is the central issue of the organization. Sloan was dissatisfied with Drucker because of his different views on organization. The secret rivalry between them is also a legend in the history of American business. Sloan’s organizational changes at General Motors opened the door to “management” in the industrial age. Drucker was uncomfortable with the complex divisional structure and the company’s values of accountability to shareholders and profits. He believed that General Motors represented a large company that was not an organization of people, but of machines. In this machine, the grassroots employees could not fully release their vitality, and their fate was ultimately in the hands of the “professional managers.” And the personal preference of professional managers, or actions initiated on a whim, may well lead a company to its doom. This includes, of course, the phenomenon of “self-deception.” In the first part of Denial, Tedrow tells of Henry Ford’s “shooting of the messenger.” Apparently, what the former Harvard professor sees as a workshop-style, non-modern management approach is the most likely breeding ground for “self-deception.” But we have to think, can the organizational structure of large corporations, which Sloan brought with him and which is characteristic of modern industry, avoid “self-deception”? Of course not.

35 Peter F. Drucker. Concept of the Corporation. Transaction Publishers. 1993. 25.

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The hierarchical organization does not systematically solve the problem of the leader’s mindblindness, or rather, the problem of the leader’s mind cannot be eradicated in the individual. The only way is to separate their minds from the organizational mind in a moderate way. As James Brian Quinn of Dartmouth College’s Amos Tuck School of Business Administration explains in the Innovation Explosion: Using Intellect and Software to Revolutionize Growth Strategies (1997), the intelligence of an organization resides in the system, not in the brain of a single individual. But this is very difficult to achieve in hierarchical organizations. The “Cassandra” that Grove expects is not very likely to occur in the middle management, and it is the middle management that is the most under-energized and is increasingly the target of criticism of hierarchical organizations. Ikujiro Nonaka is probably the last management guru in the world to place his hopes for organizational innovation at the middle management. In his theory of knowledge innovation, the middle management plays a central role.36 According to Ikujiro Nonaka, when it comes to organizational change, what really works is not the “top-down” or “bottom-up” approach, but a strong mid-management team as a connecting link. The term “a connecting link” does not mean simply passing on instructions from the top, but trying to integrate the leader’s strategic vision with the “knowledge system” of his or her team, or simply acting as a catalyst. As a Japanese management scientist, Nonaka strongly disagreed with the American management guru Tom Peters, who argued in the 1980s that corporate middle managers were a liability and should be eliminated to enhance creativity and flexibility of the company. Nonaka argued that this was tantamount to gutting the core of the enterprise: middle managers play a crucial role not only in knowledge innovation but also in the diffusion of new knowledge and corporate unity. Nonaka looks at the middle managers from the perspective of knowledge management, and he does not deny that what we often call the “middle management” itself carries a sense of power hierarchy, which is also the root of the flattening movement. However, one can try to eliminate the middle power zone that hinders the process, but it does not mean eliminating the people who hold the knowledge.

36 Ikujiro Nonaka, Hirotaka Takeuchi. The Knowledge-Creating Company. Meng Li, Fei Gao (trans.). Beijing: Intellectual Property Publishing House. 2006.

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What we need to see clearly from the “de-hierarchy,” “elimination of the middle management,” and “platform organization” is that this is a transformation of the organizational system, not just the management method. Bringing organizations back to people was a call that Drucker made back in the Sloan era. Ironically, while we hold him up as a management guru in our philosophy, we move infinitely closer to Sloan in our actions. This schizophrenia is like a metaphor for post-modern society, tragic to the extreme. Management is uninteresting, which was predestined from the beginning of its evolution into a discipline, because the machine-like management is uninteresting. The dissipation of the unique fun of human beings and the infinite growth of mechanical power have also immersed people in a huge misunderstanding for more than half a century that “innovation” is only the behavior of a minority. The survival of this minority also depends on the support of leaders on a whim. Too often, we narrowly interpret Gary Hamel’s phrase “Bringing Silicon Valley Inside”37 to mean creating a hyper-organizational body like an innovation task force. But the existence of such institutions is often not perpetuated, and even when it is, it is subject to inescapable intraorganizational strife. It may be that in the short term, such institutions can bring innovation efficiency; but in the long term, the loss of efficiency is not reduced. Fun in management is not about entertainment, but a high degree of congruence between human vision and current behavior, which means that there is no friction between their natural aspirations and their market goals. In a traditional organizational structure, such an ideal is categorically unattainable. This is why companies like Semco SA in Brazil and Haier in China are sought after. Both put people at the heart of the organization. Semco SA features employee-defined salaries; Haier goes a step further and insists on user-paid salaries for a long time. These two institutional innovations address exactly what Tedrow calls the problem of “self-deception” by leaders. Executives are no longer developing a strategy that seems to work over the long term, but instead empowering employees to match their abilities and interests to the market. This is not a deliberate move against 37 Gary Hamel. Bringing Silicon Valley inside. Harvard Business Review. https://hbr. org/1999/09/bringing-silicon-valley-inside. Sep.–Oct. 1999.

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the grain, but a necessary one in an era of big innovation explosions. Top-level strategy tends to look five or even ten years into the past, and in a new cosmology where time and space are sufficiently squeezed, five or ten years is enough for a remarkable company to decay quickly into fossilization. The speed of human change is the speed of market change, and humans happen to be the most changeable animals, especially in the context of today’s increasingly emotional new media. No strategy supported by traditional organizational structure can catch up with the speed of emotions, and I am afraid the only way is: let people satisfy people, and let employees satisfy themselves.

CHAPTER 5

Capturing Mindshare: On the Digital Consumer

1

Every Company Is a Stage

Companies take services as a stage, commodities as props, and consumers as the center of attention to create activities that engage consumers and trigger them to become lifelong customers.

1.1

Service Is Being Replaced by Experience

There is a family story: Dad bought a new suit. Grandma asked, “What kind of fabric is it made of?” Mom asked, “How is the workmanship? How much is it?” The daughter asks, “What brand is it?”. We can see from the story how economic patterns have changed over the years. In the beginning, humans took resources from the earth they lived on—such as cotton, coal, coffee, etc.—and sold them as commodities. Then came consumer goods, let us say cotton, which was processed into ready-made clothes, and the mass production of similar consumer goods led to the birth of the product economy. Later, a service economy slowly emerged, where the price and technical differences between products gradually narrowed and the most critical factor influencing customers to buy products was the quality of service, in addition to the brand of the product and the image of the company.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 Y. Hu, Seismic Digital Shift, https://doi.org/10.1007/978-981-99-5953-2_5

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From the 1970s onwards, the service economy started to become the engine of economic growth. This is reflected in two aspects: first, the service sector (mainly focused on finance, hotels, retail, health, public services, information technology, and education) has been increasingly important in the industrialized economy. Compared to previous decades, the current list of Fortune 500 companies includes more service companies and fewer manufacturers. Second, the relative importance of services in products has increased. Today’s products have a higher percentage of service components than in previous decades, which management calls servitization of products. Today, almost every product has service components. Even the line between manufacturing and service is increasingly blurred. Nike is a sports company, yet it is one of the Fortune 500 service companies, not one of the industrial companies, because it knows how to manage lifestyles. People who are accustomed to tangible goods have also experienced a process of adapting to intangible services. They have come to realize that the old dichotomy between product and service has been replaced by a service-product continuum. Business management guru Prahalad gives a fascinating example of the profit model shift of manufacturing companies in the next-generation economy in his book The New Age of Innovation: Driving Cocreated Value Through Global Networks (2008): Bridgestone, a world-renowned tire manufacturer, produces tires, which is typical of manufacturing. However, Bridgestone has achieved the cross-domain from selling products to selling services. It turns out that Bridgestone collects the driving habits, driving conditions, and tire wear information of each consumer, i.e., driver, through the sensors installed on each tire, and digs out the best tire parameters for them under different road conditions through comprehensive analysis. Consumers driving according to this tire parameters can save fuel and tires—that is, to save money. Thus, Bridgestone boldly changed its profit model: giving away tires for free, providing information on tires and driving for a fee, and charging according to the mileage driven, thus changing the relationship between companies and consumers from transactional to service-oriented, a perfect blend of B2B and B2C. However, according to two American authors, B. Joseph Pine and James H. Gilmore, service is being replaced by something more elusive and controversial: experience. Pine and Gilmore have produced a book called The Experience Economy, which is subtitled Work is Theatre & Every

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Business a Stage.1 The authors claim that we are crossing the threshold of the experience economy and, in a larger sense, that we are entering a new era of the economy: the experience economy has gradually become the next stage of economic development after the service economy. “If you charge for goods and tangible things, you are in the commodity business. If you charge for the activities you do, you are in the service industry. Only when you charge consumers for the time they spend with you are you in the experience business.” The experience referred to here is when companies take services as a stage, commodities as props, and consumers as the center of attention to create activities that engage consumers and attract them as repeat customers. In consumers’ eyes, personalized experiences hold a higher value than simple commercial transactions, and they are willing to pay extra money for them. The two authors compare the rise of the experience economy to the rise of the service economy. Services are beginning to look more and more like commodities today due to the advances in technology and rising consumer expectations. The authors assert that those companies that are territorially confined in an ever-shrinking field of goods and services will lose their chance of survival. To avoid this fate, companies must learn to create rich, compelling experiences. Services delivered in bulk often result in poor experiences. Customers have endured such experiences since service providers applied the mass production rules that manufacturers use to drastically cut costs to service delivery. Consumers do not complain about having to pay for paid services; it is the poor service they are unhappy with. In the 1970s and 1980s, when the service economy was in full swing, consumers were generally not choosy as long as you provided a service. But today, it is no longer enough to simply provide service. Consumers are not looking for services—financial or otherwise—they want experiences. To date, experience has received far less attention than it deserves as a new dimension of economic growth. In fact, experience has long been embedded in economic activity, but for too long consumers, businesses, and economists have relegated it to the service sector, lumping it in with routine actions such as going to the dry cleaners, fixing a car, installing a phone, going to the bank, and so on. Experiences are different from services. When a customer buys a service, he is actually buying a series 1 B. Joseph Pine, James H. Gilmore. The Experience Economy: Work is Theatre & Every Business a Stage. Harvard Business School Press. 1999.

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of intangible activities that are customized for him. But when he buys an experience, he buys time and enjoyment in which he takes a series of memorable activities that are choreographed as a play and acted out for him in a way that he likes. Still take Nike as an example: to encourage running, it holds several offline activities every year, sparing no effort to attract more people to participate in the sport. It intends to develop running from a boring single-player exercise to a community-based healthy and trendy lifestyle. To this end, it keeps improving its running training applications and humanized social network services, and launches a series of mobile applications whose keyword is precisely experience. As Jayme Martin, vice president of Nike’s global running category, said, “The Nike + Running is one of the most personal and motivating experiences we offer runners. We will open a new chapter in the running experience with this new service model that combines connectivity, community, interactive sharing capabilities and data-based evaluation.”2 Rather than see consumers throw away their old shoes, Nike aims to build a stronger relationship with consumers, not just by getting them to use its products, but also by getting feedback and giving them increased added value. The same goes for the aforementioned case of the tire brand. With the ability to accurately assess tire wear over each period of time, tire companies can provide individualized advice to vehicle owners. For example, a set of tires with only 20,000 miles on them is wearing out badly. Upon the installation of sensors, the use of the tires can be monitored instantly and the data transmitted to the data center. The tire company can then prompt the driver to be careful, slow down, check the tire pressure, or go to the nearest service station to change the tires. Imagine if you are this driver, would you feel good about your experience? Would the relationship between you and the company be stronger as a result? There are other benefits from this model thanks to the feedback mechanism. Tire companies have access to detailed information about how each driver drives the car, as well as load, speed, braking habits, and a variety of other important data that can help with new product development.

2 The Brand-new Nike + Running Experience: Smarter, More Interactive and Motivating. Sina Sports. http://sports.sina.com.cn/o/20120626/20166115374.shtml. June 26, 2012.

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Focusing on consumer experience requires companies to examine their products and services from the standpoint of consumers, to focus on communication with consumers, to listen to their inner desires, and to transform their business model from a transaction base (e.g., selling a pair of shoes or a tire) to an ongoing relationship. 1.2

The Beauty of Experience

Experiences can be divided into four types—experiences of entertainment, experiences of education, experiences of escapism, and experiences of esthetics (4E: entertainment, education, escapism, esthetics). The best experience is a blend of 4E. Entertainment is certainly a good way to attract customers. In Las Vegas, the stores dress themselves up like ancient Roman bazaars, and every hour, shoppers can enjoy a 5–10 minute show, such as a parade of 100 soldiers marching in formation. Although this time spent enjoying the show takes up some of the shopping time, the percentage of shopping spent per square foot is much higher in Roman-style stores than in general shopping centers. Unlike an entertainment experience, an experience of education requires greater initiative on the part of the viewer in order to enhance personal knowledge or skills. For example, restaurants offer hands-on cooking classes and special events such as wine tastings; pottery workshops teach pottery making; and a rural tourist attraction in the Netherlands offers visitors the opportunity to watch traditional wooden shoe carvings, where the visitors can talk to artisans and make their own shoes and woodworks. The experience of escapism allows the viewer to be fully immersed and actively participates in the shaping of the entire experience. For example, a ski trip or a virtual reality experiment can trigger this type of experience. The experience of esthetics arise from activities such as visiting the Grand Canyon or seeing a show at the Paris Opera. In the experience economy, producers have six ways to increase consumer demand for their products. The first is to integrate the product into a brand with an experiential twist. This means creating a brand image that emphasizes the good experience consumers have when they buy, use, or possess the product. Nike shoes and Harley-Davidson motorcycles do this, as does the famous “Intel Inside” marketing campaign.

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Second, as consumers’ need for experiences increases, so does their need for items that help generate them. This will require the provision of more sensory stimulation props, such as souvenirs. Third, add more elements to the product that trigger sensory resonance in consumers. Fourth, intentionally create a shortage of products to stimulate consumers’ desire to possess them. Fifth, organize product clubs. Sixth, initiate special events around the product. The experience economy can create the illusion that companies see each consumer as a unique individual and thus meet their individual needs. Think of the experience of visiting Las Vegas, playing at Disneyland, eating at the Hard Rock, and buying shoes at Nike City. Making transactions memorable is the key to a new economy that confronts consumers who grew up in front of computers and TV screens. 1.3

N = 1, R = G

In the era of economies of scale, companies mass-produce exactly the same goods and sell them to a homogeneous customer base; with the advent of the new economy, economies of scope and mass customization have emerged one after another. Prahalad called the diversification based on the needs of individual customers “N = 1,” that is, the unique personalized experience of consumers is the basis of value. At the same time, he suggests that no company can satisfy any consumer’s experience at a moment’s notice in terms of scale and scope, and that companies must acquire resources on a global scale, i.e., R = G (R for resource; G for global, i.e., globalization). Note that in this case, accessing resources is not owning them. According to Prahalad, in the age of the Internet and globalization, big changes are inevitable, but companies must know that the two pillars of change are N = 1 and R = G. Bringing the two together is how to use a wide range of resources to satisfy the value proposition of the individual consumer, and this satisfaction process is done by the company and the user together. “If the trajectory of value is shifting from products and services to experiences, then it is certain that value creation must be focused on

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the individual consumer.” Prahalad writes.3 In this change, the user experience is where the value delivery ends.

2

Is Free a Business Model?

Today’s online entrepreneurs must create not only products that people like, but also products that people are willing to pay for.

2.1

The Price Paradox of High Technology

In 1996, one of the most bizarre business battles in history erupted between Microsoft and Netscape: both sides competed to get their browsers into the hands of customers for free. Some years ago in the China Mobile-China Unicom war, the two mobile operators competed to launch various cell phone plans, which included a certain amount of talk time, a certain number of SMS messages, and even a free phone after you used a service that reached a certain tariff. eBay is favored by investors in the North American market by charging sellers, and it has been profitable and even lucrative from the start. However, Jack Ma announced that Taobao in China is free, and “will be free for several years.” eBay (through Yiqu), which had almost monopolized the entire C2C market in China, was challenged by Taobao, a latecomer, and finally lost. Are these companies crazy? Not really. They are simply following a completely new set of rules. These rules may seem contradictory, but in the context of today’s dramatic changes in the price and capacity of digital technology, it shows a profound meaning. The reasoning is simple: Microsoft and Netscape give away free browsers because they are competing for the opportunity to develop Web browsing standards; mobile operators are competing for more customers from rivals in order to promote new telecom services that bring more value to customers; in Jack Ma’s view, the Chinese C2C market around 2005 is

3 C. K. Prahalad, M. S. Krishnan. The Core Competencies of the Next Generation of Companies. 21st Century Business Review. http://finance.ifeng.com/news/20090325/ 477669.shtml. Mar. 25, 2009.

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not about whether to charge—in terms of transaction credit, logistics and distribution, Internet penetration, e-commerce population, etc. Chinese consumers are not in the same world as US consumers, and the most important work is to dig the Chinese “reservoir” as large as possible, as soon as possible. Humans have a deep-seated instinct to get a free lunch. In terms of the Internet industry, many entrepreneurs recognize this point; they have used the old sales trick—free gifts, in an attempt to build a brand, expand market share, and play triumphantly in the online battlefield. They see the Internet as a new, uncultivated land that they must seize now—no matter what the short-term cost of doing so, because it will naturally pay off in spades. This is the paradox of high technology: in the moment when prices are falling fastest—even to zero—trading is still able to boom. It is easy to see why free is attractive to consumers, but it is not always obvious how companies can make money by giving out products and services for free. Companies often have to think about: How can they remain competitive in a world where technology products are available almost for free? In the book Free: The Past and the Future of a Radical Price, Chris Anderson tries to explain why free is increasingly becoming an effective business model.4 The underlying economics of digital technology dictate that the free model is more likely to flourish in the digital world than in the analog world. The reason for this is that information products and services have a “very special” cost structure—high fixed costs and low marginal costs. The production of the first information product consumes a very high cost, but the cost of producing (or reproducing) subsequent products is negligible. For example, once the first book is printed, the cost of producing another book is only a few dollars; it costs less than a dollar to burn a CD, and most of the cost of a billion dollar Hollywood movie is spent before the first copy is made. This cost structure carries many important implications. The vast majority of the fixed costs of information production are sunk costs, i.e., costs that cannot be recovered if production stops. If you invest in an office building but change your mind and do not want it anymore, you can sell the building and recoup some of the cost. However, if you make a movie that fails, there is no market for you to re-sell the script. Sunk 4 Chris Anderson. Free: The Past and the Future of a Radical Price. Xufeng Jiang, et al. (trans.). Beijing: CITIC Press. 2009.

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costs must usually be paid up front before production begins. In addition to this, most information products have increasingly high marketing and sales costs. Variable costs for information products also have a special structure: if a large number of copies have already been produced, the cost of producing one more copy does not increase. Microsoft is not like Boeing, nor is it constrained by depreciation and production capacity: information companies can easily expand their production capacity to meet demand in a single day. If you can produce one copy, you can produce a million or even 10 million copies at the same unit cost. The unique cost structure dictates the birth of the free economy. Google had to invest billions of dollars in software and infrastructure to get its massive search engine up and running, but subsequent incremental searches cost it almost nothing. 2.2

Freemium

The free business model is based on a “cross subsidy,” which is why you get a “free” phone when you subscribe to a mobile carrier’s long-term service package. Similarly, digital TV companies give away free set-top boxes in order to get you to subscribe to pay channels. The Freemium model is one of the most common business models in the online space. The term was coined by venture capitalist Fred Wilson,5 which means that services are divided into different tiers, from free to premium. For example, some websites and software have a “Pro” version that offers more features than the free version if you pay for it. This is called price discrimination, i.e., to those consumers who value your information products highly, sell the products at a good price; and for those who buy occasionally and are not willing to pay for them, the products can be sold at a low price or even distributed to the general public for free, because the more widely the products are distributed, the more likely they are to attract paying customers. The core of the Freemium model is to lose money on the free services but make money on the premium paid services, using the former as a cheap promotional tool. For example, millions of Skype users make audio and video calls online without paying a dime because a small percentage 5 Fred Wilson. The Freemium Business Model. https://avc.com/2006/03/the_freemi um_bu/. Mar. 23, 2006.

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of users are paying for the extra features to subsidize the free users. Typically, a website follow the “Law of 5%,” meaning that the 5% of paying subscribers are the source of all revenue for the site. This model works because the cost of providing services to the remaining 95% of users is quite low enough to be negligible. Advertising is arguably the best known free model. You do not have to pay for either wireless TV shows or search services, and the reason for both is that the content you get for free is attached to ads. Of course, Anderson points out in his book that ads are unlikely to generate revenue for all content online. If you’re a blogger, no matter how talented you are, I am afraid the revenue you win from Google AdSense will never make your writing quite profitable. If blogging is more about fame and influence than making money, or if writing a blog is about soliciting more lucrative business, like book publication or speaking engagements, there is nothing wrong with the free model. But if you want to make a living purely online, then “free” can be a problem. Even Eric Schmidt, former CEO of Google, admitted that the free lunch is not available to everyone. The problem with the free model, he says, “is that it precludes all price discrimination structures in the marketplace… It tends to create a winner-take-all.”6 This is not to say that there is no opportunity on the Internet except for free model. Anderson points out that it is not that hard to compete with the free model, as long as the merchant can actually offer something better or different. Digital products and services that are truly unique and can meet an urgent consumer need can still win the hearts and minds of consumers. There are two ways to sell a product at a high price to high paying customers. The first is to add value to the product. Reuters Group avoids the pitfall of commoditizing its own products by organizing its key offerings in a way that is useful to customers and thus different from those of its competitors. The second is to not give your high-end customers the opportunity to buy at a low price. In the Internet economy, companies must use a variety of methods to segment their markets and take full advantage of information processing technologies to do a better job of segmenting, because if they can’t find ways to charge high prices to high paying customers, then they will have 6 Chris Anderson. Free: The Past and the Future of a Radical Price. Jiang Xufeng, et al. (trans.). Beijing: CITIC Press. 2009. Chapter 8.

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to sell generic information to low paying customers. And generic information online, like phone numbers, news, stock prices, maps, etc., is simply being sold at a price that preserves marginal cost, i.e., “zero.” The previous day’s economic information is available to everyone and costs nothing to access, but traders are willing to pay thousands of dollars for scarce real-time financial information and analysis that can help them predict future prices. Thus, there is a multitude of content spaces between free and premium, with varying levels of value and potential revenue. 2.3

Network Effect

Although consumers now expect most of the content they see online to be free, their expectations and behavior are subject to change. Before the introduction of cable, satellite, and DVD, wireless TV was completely free for however many years. If enough benefits can be shown to consumers, they will be willing to pay to get what was once free. This is something that online companies have to think deeply about today. While free brings a lot of traffic, as evidenced by the explosive growth of Twitter, for example, mass popularity does not endorse a business model that cannot take hold. To be sure, those companies with pricing power do not always choose to use such power. Millions of people are willing to pay for their favorite social networks, but the potential network effects brought about by scale make the free model an irresistible strategic choice. In addition to economies of scale on the supply side, another key aspect of information product markets is network externality on the demand side. When the value of a product to one user depends on the number of other users of the product, economists say that the product exhibits network externality or network effect. Communication technologies are a prime example: telephones, fax machines, modems, e-mail, and the Internet all show network effects. Technologies subject to strong network effects typically have a long introduction period, followed by explosive growth. This pattern is caused by positive feedback: as the installed base of a product increases, more and more users find it worthwhile to use the product. Finally, the product reaches critical mass and captures the market. This network externality is also a prerequisite for the emergence of winner-take-all. Therefore, growth is a strategic imperative for Internet companies, not only to obtain

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the usual production-side economies of scale, but also to obtain the demand-side economies of scale generated by network effects. In the future, the Freemium model will become increasingly important. It will allow companies to maintain the economies of scale and advertising revenue that come from the free model on the one hand, while allowing them to open up additional revenue streams on the other. The Wall Street Journal, for example, has adopted such a hybrid model: both paid content and free content. Anderson said, “‘Free’ alone is not enough; it must be paired with ‘paid’ … Today’s online entrepreneurs must create not only products that people like, but also products that people are willing to pay for. ‘Free’ may be the best price, but it can’t be the only price.” This is an anti-climactic conclusion. In fact, information technology will never be free. Because every time these technologies just become somewhat cheaper, someone will poke their way in to massively utilize the technologies to make them rare again. Then, people will demand new technologies with more capacity and faster processing speed. The cycle will never end as long as imaginative people keep thinking of better things.

3

What Is a “Big Product”?

With more information and more communication elements, the traditional product will be transformed into a “big product.”

What is a product? This seems to be a very simple question. What consumers eat, wear, use, and play are all products. But we also need to define it in terms of management. One way to put it is that a product is an object or intangible vehicle used to satisfy people’s needs and desires; in short, anything that can be offered to the market, used and consumed by people, and that satisfies some need, including tangible objects, intangible services, organizations, ideas, or a combination thereof. This definition is complete, but unfortunately, it is still a definition of the industrial age. Although the people who use and consume the product are also mentioned here, the users and consumers in the definition still sound like passive individuals or groups with weak subjectivity. In the network era, we need to add more content to the product that endows users with subjectivity, and such additions can be broadly divided into two categories: one is information, and the other is communication.

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Product Is Information

Big data is popular today. Many companies are thinking about how to use big data analytics to increase revenue and market share, yet few are seriously thinking about how to add more data to their products to take not only their products but also their product development to the next level. Thomas C. Redman mentioned a concept in his blog on the Harvard Business Review website that I think is pertinent: Every company must have an informationalization strategy.7 The “informationalization” here does not refer to the process of using a series of modern technologies such as computer technology and network technology to improve the efficiency and level of production, operation, management and decisionmaking through the in-depth development and extensive use of information resources, thus improving the economic efficiency and competitiveness of enterprises. It is narrowly attributed to product thinking, which means that by building more data and information into existing products and services, informationalization makes them more valuable to customers. Almost all products and services can be made more valuable by informationalization in this way. For example, by building GPS into a car, owners can get to their destination faster, saving time and fuel, and thus making the car more valuable. GPS is just one type of sensor. The growing number of sensors in today’s cars not only makes them better, but also gives manufacturers the opportunity to better understand how the car is running and how the owner is using it by pulling out the data from the sensors and feeding it back into the design process to optimize the future consumer experience. Informationalization is located at the confluence of two age-old needs: the first is that there is no end to the improvement of products and services; the second is that all people want more relevant, timely, accurate, accessible, detailed and integrated data in their personal and working lives. Redman was actually inspired by futurist Stan Davis. As early as 1991, Davis co-authored the book Vision 2020, in which he proposed a series of formulas for “informationalization,” such as: 7 Thomas C. Redman. Integrate Data into Products, or Get Left Behind. https://hbr. org/2012/06/integrate-data-in-products-or-get. June 28, 2012.

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informatization = personalized products + rapid response; informatization = manufacturing at the point of delivery; informatization = reduction of overhead costs, inventory, and working capital; informatization + direct entry = higher service standards; informatization = ties within the organization; informatization + logistics = globalization.8 So, while big data analysis/mining is important, informatization of products is also important, and companies need a process to move from big data to big products. Although the former attracts more attention, the latter is actually easier to get started, can bring better benefits, and enhance the competitive advantage of the company. 3.2

From Single Value to Interactive Value

Of course, value can be obtained from traditional products and services with less information and data, but this is only a kind of single value, unlike products and services that can obtain interactive value after “informatization.” What is interactive value? When summarizing Haier’s transformation experience, I once proposed a formula: interaction value = information volume/scale. How does an interaction have value? Because it is infused with information. Information can add value to a product. Standardization solves the problem of mass production without increasing the amount of value of individual products; even standardized production dilutes the value of individual products due to its destruction of scarcity. Information, on the other hand, can enhance the added value of the product itself, and the greater the amount of information, the higher the value of the product. Therefore, the value of an interactive product is equal to the amount of information divided by the scale. In the industrial era, companies had to adopt standardized production methods in order to achieve mass production, which made the value of each product shrink relatively. Those products with high added value that are not mass-produced are also high in price due to high costs. In the 8 Stan Davis, Bill Davidson. 2020 Vision: Transform Your Business Today to Succeed in Tomorrow’s Economy. Simon &. Schuster. 1991.

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future, open-source design, combined with 3D printing and more flexible robotic assembly lines, will enable companies to sell small-scale made products at reasonable prices, enabling customized production at scale. Custom production, on the other hand, will better meet the diverse needs of people, which actually attaches special information to each product to cater to different people’s expectations. This approach definitely adds value to the product itself. The same is true for service. Unpleasant experiences for consumers come from slow service, inaccurate orders, and situations that require extra effort on their part. These are all tied to information. By focusing on “reducing information resistance,” companies can create a user experience that is different from that of many other service industries. Today’s consumers resent being treated like “wallets with legs.” Business leaders must understand that business is not just about buying and selling or exchanging goods by money. Business should be, and increasingly must be, an expansion of the personal connection that stays with customers throughout their lives. While business people often think of business as selling things to customers, true leaders understand that all business is personal. Ultimately, business success relies on a group of people paying attention to others and profitting from it. While the average company tends to offer a “one-size-fits-all” service, the legendary company always finds a way to go beyond a solid service platform and create a personalized experience. Everything has a risk of commoditization (mostly due to the speed of information delivery and the consumer’s grasp of technology). Delivering a precise, fluid, and convenient user experience in a disciplined way in its operations provides a solid assurance that the company is fighting against the commoditization of sameness—it focuses on maintaining a personal connection with consumers. And personal connections can only be made by information, not by scale. The only brands that survive and thrive are those that “wow” consumers. Conversely, brands that merely satisfy consumer needs are on the verge of extinction. 3.3

Product Is Communication

Information is only the first type of addition to a product; the second type is communication. Adding communication to a product may sound confusing, but in fact it is the establishment of a communication and

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sharing mechanism in the product that makes the product communicative. A communicative product, which we call a viruses-like product, grows organically, with each existing user bringing in more than one new user through user referrals. A product can be called viruses-like if it has the following five characteristics. First, the product’s core purpose is enhanced by interaction. If the use of a product does not enable this, users have no incentive to avidly share their own experience with the product. This is not to say that the product is not valuable if it is used in isolation; rather, the product’s users realize that the product becomes more valuable by interacting with other users. Second, users of a product can form networks around the use of the product. A network here refers to a group of people who share common interests and goals, or who are similar in traits. Viruses-like spreading requires sufficient scale and constant “recruitment” of communicators. Small networks are not able to meet this requirement, so niche products experience difficulty in viruses-like growth because their applicability is limited and it is more difficult for any given user to understand who else the product will appeal to. Third, the product benefits from existing human connections. The ease of user-user interaction may not be sufficient to motivate viruseslike spreading; some products can be clever enough to enable interaction between users without growing “viruses” because users lack the incentive to refer others to the product. For example, if a game allows multiple players to be randomly selected, the experience is not enhanced by the interactions of those players because there are no existing human connections among them. This suggests that viruses-like products rely on networks that actually exist in the real world. For a product to grow, it must spread across the existing interpersonal networks of its users. Skype is an example of this, allowing users to make casual connections across a wide range of people, and conduct potentially interesting conversations (and a lot of nuisance too), but the real trigger for Skype’s growth is that it connects people who already know each other. If it had not developed such features, or enhanced them, it would not have viruses-like growth. The massive popularity of WeChat exploited this even more: to register for WeChat, you either had to go through QQ or your cell phone number, which is WeChat’s two-level screening mechanism. Especially, there is a real person behind almost every cell phone number. Starting from WeChat 5.0, the registration page does not even have the option to

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“use QQ number to log in,” so you can only register through your cell phone number. Fourth, the product has a strong ability to retain users. If you recommend a product to other users (i.e., send a “viral invitation”), you are endorsing the product with your reputation. Users are hesitant to recommend products that they are not completely familiar with and do not particularly like, because they risk their reputation if they are not convinced of the product’s usefulness. Therefore, the higher the user retention rate, the greater the likelihood that users will recommend the product to other users. Fifth, the product must be easy to use and recognize. People who receive a “viral invitation” will observe whether the benefits of a product can be quickly recognized, including usefulness, interestingness, and relevance, and the recognition will greatly influence how many people who receive the invitation will convert to actual users. Retention rates are related to the number of “viral invitations” and conversion rates are related to the recognition of the product’s purpose. The attractiveness of viruses is mutually reinforced by the ease of use of the product. The higher the ease of use, the higher the conversion rate of users, who will in turn send more invitations, thus bringing in more users. With more information and more communication elements, the traditional product will be transformed into a “big product.”

4

Mobile Internet Thinking Is Touchpoint Thinking

If you hold a channelized mindset about mobile, you are wasting a huge opportunity. The right mindset about mobile is touchpoint thinking.

The understanding of mobile Internet starts with perception. In 2013, there was a very popular word called “Internet thinking,” and I would like to discuss mobile Internet thinking. Why did I mention perception earlier? Because from the perspective of human perception, whenever we encounter a new problem, we usually look at it in the old way. For example, horse-drawn carriages used to be the main means of transportation for human beings, but when cars first appeared, people

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found that there was no way to define cars, so they would naturally call a car “horseless carriage.” This is a case where existing perception influence our perspective on something new. So when we first feel the potential of mobile, we are most likely to think of it as some kind of path, as evidenced by the different ways we call mobile—we call it a channel or a conduit, or a pipeline. I call this perception “channelized mindset about mobile,” because when different people come into contact with mobile, they may come to know it according to their own cognitive framework. If you are a customer service agent, you feel that mobile brings you a new channel to communicate with customers; if you are a product manager, you enjoy a new distribution channel through mobile; if you are engaged in marketing, you think mobile as a new and better platform for activities. These channels or conduits, or pipelines, are most likely to remind you of water flowing through pipes. Typically speaking, there are valves on either side of the pipe. The user of the pipe, or the owner of the pipe, may open these valves when sending and receiving messages. From a channel perspective, the flow of water may be two-way or one-way. If we use it to get feedback from customers, it is two-way; if we simply publish content, it is one-way. This is typical of the channelized mindset about mobile. This kind of mindset is very wrong. It is partially correct, but overall, as a cognitive framework, it is very wrong, because mobile is far from being summed up by words like channel or pipe. The greatest characteristic of mobile is the possibility of constant contact. For example, cell phones have three main characteristics. The first is agency, which means that you are the subject of using the phone. The second is intimacy, i.e., the phone is almost always with you. The third is immediacy, i.e., cell phone communication is real time. These three things make the cell phone not at all like any channel, not even like the World Wide Web we are familiar with. So, a long time ago, Wired magazine published a very insightful article titled “The Web is Dead. Long Live the Internet,” which is based on the fact that the world of mobile is completely different from the World Wide Web. Another thing related to mobile is not cell phones, but tablets. Tablets actually do not fit the characteristics of channels, but they are different from cell phones. Tablets allow us to go deeper into the content more easily, which I call “immersive experience.” We can spend a long time on a tablet whether we are looking at content or playing a game. Tablets

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provide us with an immersive experience, and cell phones keep us in continuous contact, so neither of them can be considered as a pipe with valves. If you hold a channelized mindset about mobile, you are wasting a huge opportunity. The right mindset about mobile is touchpoint thinking. There are multiple touchpoints, and by mobility I mean an ecosystem of multiple touchpoints. Whether they are cell phone touchpoints or tablet touchpoints, you can use them alone or associate them with social. If you, as an enterprise, can connect these touchpoints into a seamless system, then you will be able to meet the diverse needs of your users in different scenarios. Interestingly, why is mobile a completely different world from the World Wide Web? The reason is that these unique mobile touchpoints are not just what you see now, such as mobile websites or applications, they are also instant messaging, advertising, and geolocation services. All touchpoints are more integrated in the mobile experience than in the traditional World Wide Web. For example, you’ll find that ads on tablet applications are much more interesting than traditional website ads because the ads are the content. A good mobile strategy maintains the richness of the various touchpoints, and the most taboo thing is to use mobile as a single channel. When you think of mobile as a touchpoint, be sure to stay open to the future, because you do not know what else will be added to this multi-touchpoint ecosystem. For example, today’s electronics exhibitions have been largely occupied by smart cars, smart appliances, smart homes, etc. In other words, your car and home appliances may at some point in the future become a touchpoint in this multi-touchpoint ecosystem. So, consider the mobile issue from the perspective of touchpoint, not from the channel perspective.

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5 How Companies Master the Play of Social Platforms The term social platform is more accurate than social media. The word “media” suggests a one-to-many broadcast process, yet people who use social platforms have always sought to build many-to-many relationships.

Ten years ago, almost no one had heard of social media; today, social media outlets like Facebook, Twitter, and LinkedIn have more than a billion users and account for almost a quarter of the Internet’s traffic. Seemingly overnight, social media has become an integral part of modern life, and we rely on it to make friends, fall in love, get news, and even do business. What is the difference between the new spaces constructed by social media compared to traditional channels? Mikolaj Jan Piskorski, professor of strategy and innovation at IMD Business School, has written several case studies on social platforms and businesses, involving Facebook, Twitter, LinkedIn, Wikipedia, MySpace, Zynga, eHarmony, Friendster, Meetup, and Yelp. Finally, he brings together these case applications into a book to answer this question.9 He argues that social media is trying to meet a social need that people cannot fulfill offline, or if it can be met, the cost is too high for people to afford. For Piskorski, unmet social needs—what he calls “social failures”— are what make social platforms attractive to people. There are two types of social failures: those associated with people’s reluctance to meet new people, called “meet” social failures, and those associated with people’s reluctance to share private information or social support with friends they know, called “friend” social failures. When developing a social media strategy, companies need to think about whether they should achieve their goals by providing a “meet” social solution or by implementing a “friend” social solution. This can lead to four different configurations of social strategy: low-cost “meet” solutions, lowcost “friend” solutions, increased-purchase-intent “meet” solutions, and increased-purchase-intent “friend” solutions. 9 Mikolaj Jan Piskorski. A Social Strategy: How We Profit from Social Media. Princeton University Press. 2014.

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Piskorski also distinguishes between digital and social strategies. Companies need a digital strategy, but even more so a social strategy, which is far more complex because it requires companies to meet both the economic and social needs of consumers. To meet economic needs in a straightforward way, companies can draw on the wealth of marketing experience they have accumulated over the years and apply it to the digital space, but most companies know little about the costs of social communication and the ultimate social needs of consumers, and even less about how to meet those needs effectively. Nowadays, most companies have difficulty specifically identifying the types of social failures and therefore cannot offer the best solutions. Even more damaging is the fact that companies have to provide economic solutions while addressing these problems. In other words, a company’s solution must both help users improve their social relationships and bring financial benefits to themselves. The most common mistake companies make on social platforms is that they think they can simply move their digital strategy to the social environment; in other words, they either use social platforms to broadcast corporate messages or try to get user feedback with the platform. Users resent this manner because the purpose of their activity on social platforms is to connect with others rather than with the companies. Imagine this scenario: you’re having dinner with friends and a stranger barges in, sits down and says, “Hey, can I sell you something?” Your reaction must be “no” because he interferes with your conversation with your friend. It is surprising that so many companies do not understand such a simple truth until they’ve been taught a lesson in reality. That is why companies need to design social strategies to help people create or strengthen relationships. A social strategy works because it aligns with the expectations and behaviors of users on social platforms. In that dining scenario just mentioned, a salesperson with a social strategy would say this to diners, “If you need to develop better friendships, I have something that can help.” A successful social strategy has three characteristics: (1) reduce costs or increase consumers’ willingness to buy; (2) help users build or strengthen relationships; and (3) encourage users to do something for the company for free. Many companies flock to social platforms, such as setting up fan pages or official accounts, and counting the number of followers they have gained or the number of “likes” they have received day after day—this is not a social strategy. The reason is simple: if these numbers

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do not lead to higher sales or lower costs, then they are illusory. Good social strategies always address these three characteristics. For example, American Express has created a proprietary social platform to help small business owners connect with each other and solve business problems; Yelp encourages contributors to write more reviews, and awards prolific contributors with “Elite” status, which allows them to attend parties and meet other “elites”; NikePlus allows users to track their fitness performance and share exercise tips, such as favorite running routes, with fellow athletes. It is important that companies avoid the misconception that social platforms are just another channel and try to advertise to users on the new channel. This path is not going to work at all. No matter how much effort companies make, most consumers will not recognize and trust brands the way they recognize and trust their friends. The right path is to make your product or service more social, while leveraging group dynamics to enhance communication among users. In essence, a social strategy is more risky than a digital strategy. In the case of a digital strategy, the company is effectively moving its marketing and customer acquisition efforts to social platforms and doing the same things it did before. There is little change in the business model, which reduces the risk of failure. However, a social strategy requires the company to change at least one part of the value chain, transferring the power of that part to the consumer or supplier. While this approach can increase consumers’ willingness to buy or can reduce production costs, the company can no longer manage the process directly. For example, the company can no longer guarantee access to customers by spending money, but has to win customers through customers. The above is about the social strategy of companies. From the user’s perspective, it is also necessary to explore their habits on social platforms. What is it that attracts them to immerse themselves in social networks? One prominent finding: photos. The photo is a killer app for social platforms. One statistic says that 70% of online social activities are related to browsing photos or viewing other people’s profiles. People who post photos show off their fun-filled lives, expecting to be complimented by their audience, while for those who look at photos, social media offers a subtle opportunity to delve into the lives of others without prying. Gender differences are also very interesting. Women are magnets for social platforms. The largest application category on social platforms is for men to see women they do not know, followed by men to see women

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they do know, and then women to see women they do know. Female users show less interest in women and men they do not know. Overall, viewing female user profiles and photos accounted for two-thirds of all viewing behavior, as both male and female users viewed female profiles. Taken together, it is clear that the term social platform is more accurate than social media. The word “media” suggests a one-to-many broadcast process, yet people who use social platforms have always sought to build many-to-many relationships, meeting new friends, or strengthening existing friendships. For companies, this distinction is by no means unimportant. Companies that use social media often limit themselves to producing content for customers or soliciting customer feedback. But if companies are aware of consumers’ desire to connect with each other, they can develop a social strategy. Companies that have the ability to take control of the digital space start with a business objective and ask themselves the question: “Where is the source of my competitive advantage? How can I take advantage of social platforms to better strengthen this advantage?” If they do not start with this question, no amount of effort on social platforms will produce business results, even if those efforts result in a lot of interaction with customers.

6

Who Decides the Brand Reputation

Now, brand communication is about delivering intimate messages to the community, because the kind of peddling that used to be popular is no longer viable. In order to earn trust, in addition to consistently delivering the brand proposition, brands need to create a sense of personal intimacy in the minds of consumers.

Who are the most influential people on the Internet today? They are the ones who know how to tap into the power of social networks to build brands, reputations, and profits. They are undoubtedly the natives of the Internet, who know how to exchange trust, fame, and relationships, and how to use social media to build influence. With a single hand, they can make or break a business. Trust is particularly important in building a digital reputation. It is because trust is a key asset that those who have

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the ability to transact with it, called “trust agents” by Chris Brogan and Julien Smith,10 are the people companies need most. So, why is trust so important? Because trust is a scarce factor in today’s consumer environment, where skeptical, capable, and well-informed consumers are in abundance. While the means and ways for companies to reach consumers have become rich and varied, it is increasingly doubtful that consumers are listening to the messages delivered by companies. In this light, the most valuable hard currency online is not dollars, but trust. For instance, statistics show that 60% of spending by adolescents aged 12 to 16 is to emulate other adolescents. Trust agents do not have to be marketers; they are a group of people who are tech-savvy and try to give a business a human face through transparency, honesty, and genuine relationships. They talk about their own experiences, recommend various products, and make friends by making a good impression. As advertising has become so saturated, consumers are no longer relying solely on advertising to make purchase decisions, but increasingly on the reviews of others. And one of the distinctive features of trust agents happens to be their far superior interest in people, whether they are clients, employees, or co-workers. The influence of social networks and personal connections is much greater than that of corporate marketing. Microsoft has a classic case in this regard: although Microsoft spent untold amounts of money on advertising and marketing to try to strengthen consumer perceptions of its brand, not many people bought it until a Microsoft employee named Robert Scoble, who became widely known for blogging on Scobleizer, added that little human touch to Microsoft’s marketing efforts. The response he provoked was beyond anyone’s expectation. What is Scoble’s magic formula? He just acts like a real human being, with thoughts and feelings, and even sometimes, like everyone else, has a problem with some of Microsoft’s practices. We might call people like Scoble trust agents, i.e., marketers who do not aim to sell, who do not exert high-pressure tactics, and who are committed to using the Web to do business in a genuine and human way. Scoble later co-authored

10 Chris Brogan, Julien Smith. Trust Agents: Using the Web to Build Influence, Improve Reputation, and Earn Trust. John Wiley & Sons. 2009.

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Naked Conversations: How Blogs Are Changing the Way Businesses Talk with Customers.11 Such trusted agents have emerged in many companies: Lionel Menchaca, who spent seven years as chief blogger at Dell, and Matt Cutts, a software engineer at Google, among others. Menchaca believes that the trick to communicating with consumers is to write from a personal perspective rather than from a “brand messaging” perspective, to be authentic and human. Matt is well known in search engine optimization circles and often gives advice on how to increase visibility on Google. In 2006, the Wall Street Journal even said that Cutts was to search results what Greenspan was to interest rates. The emergence of trust agents in droves indicates a real change in the world. Chris Anderson, former editor-in-chief of Wired magazine, said, “Your brand reputation is not promoted by you, but by Google.” We can further extend this: what a brand looks like also depends on what is said on Facebook or what others say on Twitter and in various social platforms. Now, brand communication is about delivering intimate messages to the community, because the kind of peddling that used to be popular is no longer viable. In order to earn trust, in addition to consistently delivering the brand proposition, brands need to create a sense of personal intimacy in the minds of consumers. If those in marketing and advertising do not recognize this, they will just be treated the same way people treat insurance salesmen!

7

The Essence of Social Marketing

When you have an organic audience base on social media, the value you provide to them is different from what advertising provides. A customer who maintains a close relationship with your brand on an ongoing basis is more valuable than a “one-and-done” customer.

11 Robert Scoble, Shel Israel. Naked Conversations: How Blogs Are Changing the Way Businesses Talk with Customers. Wiley, 2006.

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7.1

Three Major Changes in Media Consumption

The world we live in today is a completely different place than it used to be, and one of the big changes is the way we consume media. I summarize this change into three points: first, time and scenes become fragmented; second, the Internet has become the medium of all media; third, the media has become social. First, fragmentation. Half a century ago, there was a certain distance between the consumer and the medium, and usually the content produced by the medium was consumed passively by the consumer, with time and space defined in advance by the medium. Thirty or forty years ago, a new generation of media emerged, including the Walkman, VCR, video games, personal computers, satellite TV, etc., as we know them, and they were in fact the new media of that era. Why call them new media? The reason is simple. Because most of these media are run by consumers at their own expense, not by advertisers. They also apply the rule that the more money consumers spend on a medium, the more time they generally spend on that medium. Today, we are faced with a new form of media: thanks to the Internet, smartphones, and social media, we are in a ubiquitous media environment that seems to be completely at the mercy of the individual consumer. At this time, the content, the scene, and the time we consume are all fragmented, which leads to the content providers also becoming fragmented. This is the first major change I mentioned, that is, we are experiencing the transformation from mass media to “mess media”. One of the ultimate forms of fragmentation may produce the “one-person media,” where a medium has only one consumer. The new generation of media consumers has a growing demand for content, but they want it delivered by providers where they are, in the way they prefer, and at the moment they need it. Second, all the media we can imagine today are all presented on the Internet, which includes both television and radio newspapers and publications, movies and music, cameras and telephones, mass communication and interpersonal communication, video games and virtual life… These are the fundamental reasons why the Internet will trigger a media revolution, because it is the medium of all mediums, and the medium has evolved to its top in human society.

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Third, in this evolutionary process, social media emerged. What is a social medium? A social medium is one that seamlessly integrates interactive technologies, social interactions, and diverse expressions through text, images, or moving images (i.e., video). So, you will feel dizzy as you enter the world of social media, because it has countless ways of presentation, countless paths of entry, and countless content presented. Whether we summarize it as Web 2.0 or the so-called smart media, it has some basic elements that are open, interactive, and controlled by users. Through participation, conversation, and community, users are connected to each other not only for information access and entertainment, but more importantly for social interaction and social action. Since the medium is undergoing such a radical change, there is a sense of loss of control among media practitioners, a loss of focus, a loss of balance, and even a loss of their jobs. To use an analogy, when horsedrawn carriages are gradually replaced by automobiles, those who work in the carriage industry are most affected; if a blacksmith no longer has the opportunity to horseshoe horses, the blacksmith will lose his job. Murdoch says to find a suitable analogy for today’s media changes, one can only go back five hundred years and imagine the invention of the printing press.12 New technologies are shifting power from editors, CEOs, publishers, and those in the established system to a new generation of more demanding consumers—educated, unwilling to be led, aware of a competitive world, and capable of getting what they need whenever and wherever. In other words, the average person now has control of the media, and the challenge for traditional media is how to interact with these new consumers. 7.2

Markets Are Conversations

When the average person comes on the scene and starts to have control of the medium, all media boils down to one thing: conversation. Those in marketing also need to reverse their perception and see marketing as a conversation. And what is a conversation? The so-called conversation is the art of quietly learning and sharing. 12 Rupert Murdoch: “Newspapers Will Change, Not Die.” The Independent. https://www.independent.co.uk/news/media/rupert-murdoch-newspapers-will-cha nge-not-die-6106205.html. Mar. 20, 2006.

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In 2000, Rick Levine, Christopher Locke, Doc Searls, and David Weinberger co-authored a book—The Cluetrain Manifesto: The End of Business as Usual. This book has never received the attention it deserves in China. In my opinion, this book is the seminal work on marketing in the Internet age, and it makes a striking point about the future of business: the key skill of any organization is no longer marketing, but talking.13 The book opens with a list of 95 theses for reversing traditional corporate thinking, which begin as follows. 1. Markets are conversations. 2. Markets consist of human beings, not demographic sectors. 3. Conversations among human beings sound human. They are conducted in a human voice. 4. Whether delivering information, opinions, perspectives, dissenting arguments or humorous asides, the human voice is typically open, natural, uncontrived. 5. People recognize each other as such from the sound of this voice. 6. The Internet is enabling conversations among human beings that were simply not possible in the era of mass media. Business people who are cold, boring, and arrogant or even lying are actually building a thick wall between the company and the customer, blocking them out. This may have worked in the pre-Internet era, but as the four authors of The Cluetrain Manifesto observe, the Internet is filled with the voices of friends and partners, and the pretentious, institutionally self-appointed, sloganeering, and peddling voices will increasingly be blocked out as offensive and hypocritical. Now, clients are communicating with each other, and employees with each other, in a conversational language. This language is natural, honest, straightforward, and never lacking in humor. If companies ignore this manner of communication, they will be in a major crisis; if they do not engage in it, they will lose a once-in-a-lifetime opportunity for growth.

13 Rick Levine, et al. The Cluetrain Manifesto: The End of Business as Usual. Zunyou Zhou, et al. (trans.). Beijing: CITIC Press. 2002.

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The Essence of Social Marketing: Using People as a Medium

By discussing social marketing in the context of conversation, all problems can be solved. Before the official start of many large events in the West, organizers often hold a cocktail party where people walk around the hall and talk with others casually. Such a scene actually constitutes a very typical social media. The ability of a company or an organization to create a space where people can exchange ideas lies in its ability to use social media for marketing purposes. Of course, it is also necessary to provide very attractive content, but this content should be able to attract others to actively access it. So it is not about providing engaging content and spreading it yourself, it is about actively engaging others to help spread your engaging content. This is the essence of social marketing. People who used to engage in marketing always tend to fall into a misconception—follow the old-fashioned way of advertising. If you attempt to engage in marketing with advertising today, it is simply used as a metric, such as how much attention a particular marketing campaign can attract. Another important metric is how much of a sensation, i.e., a big hit product, can be created. If you look at marketing with an advertising mindset, you can basically use these two metrics to measure the efforts you have made. But marketing today is really about “people-oriented,” which is a buzzword these days, and it is about all the things that make people human. For example, how to communicate, to connect, to write, to generate collective intelligence, to get users to create and contribute ideas, to generate content, and finally to form communities—it is all about people. This is a novel marketing concept. In fact, it can be called a return, because it is a return to what people have done in the long time since they started walking upright, it was a scene of human interaction in those days. It is these most common conversations and word of mouth that bring us back to the most basic core of human interaction. Of course, this is not to dismiss the practice of measuring the effectiveness of social marketing. There is a golden rule in management: anything that does not get measured has no value. So companies still need to figure out how to use the tools to measure social marketing: how well is it doing at each stage? What is working well and what is not working well enough? How much of a real benefit did it have on the company’s performance or brand? Did it drive traffic, clicks and conversions, or did it increase user engagement and customer satisfaction?

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Measuring the ROI of social media can be difficult. Nowhere else do companies have so many customers concentrated in one channel for so many different reasons. Correspondingly, there is no scenario in which so many departments set overlapping business goals and function in the same sandbox. KPIs vary from department to department, which makes measuring the specific impact of any one social media activity somehow a huge challenge. If your goal is to sell products, then you will measure success based on financial return. If your goal is to build brand awareness, then you will measure influence based on the number of exposures, followers, or views. Do not confuse the two. For example, if you try to calculate the financial return on a campaign that increases brand awareness, or, for a campaign designed to promote products, you look at how many followers have increased. This can make the measurement extremely confusing. There is a basic concept: when you have an organic audience based on social media, the value you provide to them is different from what advertising provides. Again, the so-called social medium is actually like a cocktail party, or rather, like a teahouse or a rural marketplace in Chinese culture. All of these past ways of interacting that focused on conversational atmosphere and interpersonal communication chains are the best metaphors for today’s social media. 7.4

Nine Strategies to Reach Social Marketing Goals

What should companies do when using social media, or when engaging in social marketing? And what do they need to be aware of? First, construct yourself a strong presence on social media platforms. This is the most basic premise of all actions. Currently, there are a variety of such platforms running on the market, and companies need to choose the one that best suits their situation. Your social accounts are very important for sharing information, interacting with users, and building your brand image. Second, prepare adequately for your users. Who is active on the social media you identify or utilize there? What are your users doing? Are your competitors actively engaged as well? Is your supply chain involved? All of these should be well researched.

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Third, know the culture of social media and the necessary netiquette. The most taboo thing when using social media is to be identified as a rookie by skilled users. Fourth, related to the above, social media is very time-consuming and energy-intensive, requiring a long “immersion” in it. It is a skill that lazy ones can never master; and you’ll never know what the new medium is all about until you immerse yourself in it. Fifth, choose some suitable tools. How to design a corporate website? How to open up a corporate blog? How to set up a corporate homepage on a social media platform? How to open a microblogging account or a WeChat official account? How to design an app? New media layout, content arrangement, and tone of brand voice are all closely related to how you choose the right tools. Sixth, develop your own social media language and build a unique social media culture that sets you apart and impresses users. Seventh, this is a very difficult decision for many companies: is social media promotion the work of a few people in the company or should it be the concern of all employees? While it is necessary to have a dedicated person or a small team to manage your social media, your company’s social marketing efforts will likely be more successful if you are able to engage more or even all of your employees. This is because, while official accounts have their official purpose, in an era when employees have their own social connections, they can help expand brand awareness in a personal way, uncover more leads, increase traffic, and promote social recruiting. Eighth, build a broad network of relationships through social media and identify reliable connections to build mutually beneficial business relationships. This can include a range of initiatives: leveraging existing connections to make new ones, thus making network expansion more natural; hosting events and identifying events to take advantage of social opportunities with the greatest potential for success; maintaining a symbiosis with network partners because successful business relationships are a two-way street, and social events should be viewed not only as opportunities to get what you need from others, but also as a way to create opportunities for others; and constantly looking for new faces (even confident communicators may tend to flock to individuals they already know at social events; but it is difficult to truly expand a business network if you are fixated on the contacts you already have).

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Ninth, learn to present your company selflessly, rather than thinking about how to sell your products all the time, that is, do not push, let alone hard sell. Keep an altruistic mindset. 7.5

Common Challenges in Social Marketing

First, failure to fully understand the usefulness of social media and its power. As a simple example, when the calculator was invented, some people thought that the abacus was perfectly adequate for their needs, so why should they use a calculator? You know the absurdity of such an idea. The same is true today in terms of whether or not to use social media. Second, if you don’t have predetermined goals, this rarely results in much value from social marketing. Entering the social media space requires careful thought and setting your goals. The goals need to be refined. For example, you may even need to tailor your goals and KPIs for each individual social marketing campaign. Third, you need to carefully consider whether you’re going to focus on a certain area or market to the entire world. You need to choose your cherished or valued user base. Did you know that there are many companies that offer perfect products and services, but simply can’t succeed on the social side? That is because they do not get the right audience for their communications, no matter how compelling their content is. Too often, marketers run campaigns first and then try to identify the target market. This is a complete reversal of the order. You must first identify your target audience and then launch a marketing campaign to them. Fourth, learn by doing. Often people say, “I am not ready, how can I launch a social marketing effort?” Let me tell you a very simple truth: you will never be ready. It is the same as swimming: it is impossible to learn to swim by practicing all the positions on the shore and then getting in the water, you must jump in and hone your swimming skills. Fifth, the most abhorrent behavior in social marketing is the attempt to sell your products to others every time you speak. We all know it is tempting: you’ve built up a certain following on social media, and you’re a bit impatient to tell them about the amazing products and services you can offer them. Unfortunately, constant selling and self-promotion will only alienate your audience. The end result is that you gain followers who never engage or worse—no followers at all. The right approach is to provide value, such as generously giving helpful information and

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genuinely solving problems for users; to show, not to tell your benefits; to motivate them to engage; and to control promotional content versus value messages using the “two-eight principle” (20% for promotional content versus 80% for value messages). Sixth, another common mistake is to treat your followers and your fans indiscriminately. In the real world, you may have confidants, general friends, and some friends you only see occasionally, and you treat them differently from person to person. Similarly, as a company, if you are active in social media, you actually have to make a lot of distinctions between your audience groups in order to make different levels of investment. Seventh, you can’t take a multi-channel approach. Some companies will post the same content to many social media, so that the audience reads the same message multiple times in different places. This is a very stupid approach. In the traditional media era, if you place a TV ad, you would definitely present it in the best way possible on TV and not move the print media ad directly to TV. It is the same for social media, enabling everyone to have their own view, not a thousand people having the same view. Eighth, one of the biggest taboos is the use of machines in social. Veterans of the social space are fiery-eyed and have the ability to identify accounts that may be maintained by machines because they are impersonal. This violates the basic principle that “markets are conversations” and should be avoided at all costs. Ninth, social media is about acting quickly. When you are denigrated on the Internet, you must fight back immediately, and when someone points out a mistake, you must apologize promptly. If you attempt to squash the matter first, or respond after the situation is clarified, then by that time the negative things about your business have spread all over the Internet and are finally unmanageable. Therefore, many things need to be responded to at the first time. Tenth, track the latest development of social media. Social media, like the rest of the Internet, is always in constant evolution, and there are many new ways and applications that emerge in the process. But whenever something new enters the field, it should be carefully studied so that it can be used. Many people regard social media as the solution to all problems and the cure-all, which is of course wrong. Improper use of social media can magnify the vulnerability of a company many times over. Many people think that social media is free, but it is not. It is true that you often do

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not have to pay to use social media, but to get things done in social media requires a huge investment in people, workload, and even new tools, all of which consume money. Therefore, social marketing comes at a cost, and it is not a small one, which forces companies to urgently improve the efficiency of social marketing. Xunzi said: “It is better to hear something than not to hear it; it is better to see something than to hear it; it is better to understand something than to see it; it is better to practice something than to understand it. Learning ends up in practice.” This statement is very correct. By practically stepping into and using social media, you will immediately understand exactly what benefits it will bring to your company. The more you use social media, the more skilled you become, the more you enjoy using it. This is a learning curve, and it is important to climb along the learning curve to the higher end.

8

Community Economy and Fan Economy14

The community economy is based on the horizontal communication of community members and obtains economic benefits through the service and creation of community value; this is significantly different from the fan economy which obtains business benefits through the centripetal attachment of fans to the brand subject.

8.1

Community Economy and Pseudo-Community Economy

With the development of social communication methods, especially the Internet, the meaning of community has changed dramatically. The classical theory of community has certain characteristics and limitations, such as: the members of a community are formed based on certain social relationships; the social activities by the members are limited by a certain geographical area; the members should form a certain culture within the community that can create a sense of belonging and identity among the community members; and the establishment and maintenance of the community require a certain infrastructure. However, in the Internet era, communication and exchange have broken the original time and space

14 Co-authored with Yuqi Song.

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limitations, making it possible to establish communities without relying on certain conditions in the real world. Geographically, because of the global nature of the Internet, the composition of community members can be free from the original geographical restrictions, and members can communicate with each other remotely; temporally, community members can communicate in non-real time through the Internet. Therefore, community activities are not limited to specific activities at specific times and places, which greatly facilitates the maintenance and development of communities. Community economy is a kind of economic thinking and model based on community. It is built on the sense of belonging and identity of community members, and through the horizontal communication within the community, the needs of the community and its members are discovered, and the focus is to obtain corresponding added value by satisfying these needs and further building the ecosystem within the community. The establishment of this internal ecosystem also allows the community itself to add value by optimizing the community environment and increasing the sense of community identity, and thus has a stronger capital for outreach. In the Internet environment, the super strong communication effect and the low marginal cost of the community itself make the expansion of the community have greater economic value. For example, P1, a well-known fashion website in China, was established to provide an exchange platform for photography and fashion enthusiasts, mainly for sharing street snap, which formed a community with photography and fashion as the core. Its account system is a typical example of community economy. P1 does not open for account registration. In terms of user psychology, this closed approach of P1 sets a barrier to entry and builds a high sense of self-identity for its community members. This high sense of self-identity is expressed as a kind of capital in the social communication of community members, which makes noncommunity members who intend to join the community have a higher desire to get an account, and this desire can easily generate economic value in reality, which leads to the craze of buying P1 invitation codes. As mentioned earlier, the community economy is done in such a way that economic value is generated and further extrapolated through the satisfaction of the internal ecology. At present, there are quite a few theories that equate fan economy with community economy. In fact, fan economy is a one-way value circulation. It is shaping a brand (this brand

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can be a person, object, idea, etc.) to enlist an audience with high awareness and preference for the brand to become its fans. Such a relationship composition makes its internal information transmission one-way, i.e., the brand transmits certain information, and the fans receive the information and give feedback to the brand. Such vertical information transfer has a strong centripetal and irrational element. Fans have a blind admiration for the brand because of the lack of horizontal communication and channels and ways to obtain outside information. Even if the brand owner does not physically block the fans’ access to external information, the value system instilled in them makes them consciously reject external information psychologically. This is used in many marketing cases—from early singers to present-day brands such as Apple and Xiaomi—which at their core aim to create a frenzied cult of the target audience. Under this fervent cult, the brand subject and its operators generate operational revenue by developing brand value and peripheral products. In the Internet era, social media has also created better conditions for the development of fan economy. It effectively brings the brand subject and its fans closer, expands the scope of the brand subject’s information dissemination, reduces its dissemination difficulty, and enables the brand subject to gather more fans and gain more revenue. At the same time, the combination of social media with e-commerce and Internet finance also provides a convenient and effective way to sell products of fan economy, further increasing the revenue. For example, Xiaomi is a good player in harnessing the social media and fan economy. Xiaomi uses social media to attract and maintain fans in a variety of ways, covering almost all of the mainstream social media today. On Weibo, Xiaomi CEO Lei Jun established his personal account as the most significant force in promoting Xiaomi. As a technology company boasting innovation, the personal effect of its helmsman is widely noticed, and this helmsman naturally becomes a sub-brand under the main body of the brand. Lei Jun has 22 million microblog followers, and he updates his microblog daily, and almost all of his posts were related to Xiaomi in the early stage of its brand promotion. In terms of WeChat, all Xiaomi sub-brands have opened their own WeChat service accounts, but since service accounts are only allowed to post once a month, these accounts do not focus on fan recruitment and promotion, but rather on the maintenance of existing fans. On Tencent’s Qzone, Xiaomi also has a large number of followers. Qzone has traditionally been a neglected position for social marketing, but according to Xiaomi co-founder Li Wanqiang

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in the book Sense of Engagement: Xiaomi’s Internal Manual for Word-ofMouth Marketing, Xiaomi had gathered 30 million fans in Qzone as of June 2014. In addition, the Xiaomi Forum also brings together a very large amount of traffic, with more than 2 million visitors per day and an average of more than 300,000 posts per day, 10 times more than similar manufacturers.15 Although fans can theoretically interact with the brand subject and engage in inter-fan communication, whether on Weibo, WeChat, Qzone, or forums, only a very small percentage of fans actually interact with the subject, and there is even less effective communication between fans. The fan cohesion of the brand is almost entirely maintained by the brand subject in one direction. This is very different from the elements of community and the elements of building cohesion of community members. That’s why we call the fan economy a pseudo-community economy. 8.2

Community Economy Versus Fan Economy

The most intuitive difference between the community economy and fan economy is that the community economy is based on the horizontal communication of community members and obtains economic benefits through the service and creation of community value; this is significantly different from the fan economy which obtains business benefits through the centripetal attachment of fans to the brand subject. However, given the interactive communication characteristics of social media, the fan economy is not entirely different from the community economy. A good community can establish its own brand, thus gathering popularity and forming a certain brand centripetalism; fan economy can also make use of the interactive mechanism of social media to provide fans with a sense of community-like belonging. This leads to the confusion between community economy and fan economy in social media. However, if we look deeper, the two can be distinguished in the following three aspects.

15 Wanqiang Li. Sense of Engagement: Xiaomi’s Internal Manual for Word-of-Mouth Marketing. Beijing: CITIC Press. 2014.

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The degree of interaction between members The community is formed by the connection between the community members. Social media plays the role of a communication platform in the Internet era, which gives community members a way and channel to communicate freely. Between fans and brands, social media is mostly used as a carrier for information dissemination, with strong one-way communication characteristics. Take microblogging as an example, the main body of the community publishes content related to itself for community members to read and forward. The members get acquainted with each other through communication and further establish a network relationship. Operators of community subjects, i.e., microblog operators, gain economic benefits by organizing online and offline activities and serving community members. However, in the fan economy, the brand subject releases a new product as the core of its content and urges its fans to accept the content and consume the product. The members rarely communicate with each other in depth under the content, but mostly comment on their own, and it is difficult for fans to connect with each other through this platform. The most typical example of this is the microblog accounts of celebrities. The main body of celebrity microblog accounts are information messages released by celebrities and their PR teams to maintain the value of the celebrities, in order to make them passively accepted by their fans to maintain the cult mentality of the fans. However, many fan clubs formed based on celebrity fan groups are some kind of communities. Celebrities and their PR teams publish information about celebrities and community activities through microblogs to gain the attention of fan groups, and migrate the fan groups to instant messaging platforms such as WeChat groups to provide online and offline communication platforms for fans, and eventually gain economic benefits by organizing fan activities. Depth of interaction between members and the subject The degree of interaction between community and community subject is much higher than that between fans and the brand subject. The essence of the interaction is the same as that between the members, which is still related to the composition mechanism and communication mode of both, i.e., community is a spontaneous interactive organization based on

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the same preferences and perceptions of community members, while fan groups are based on the admiration of the brand subject and establish an up-and-down relationship. After a social media account owner posts a message in social media, the community will generate related topics, and the communication between the community members and the account owner can receive corresponding replies and answers. On the other hand, in the fan groups, the brand subject often only publishes relevant information without any extra interaction with the fans other than forwarding; in the comment spaces, the fans often do not make interaction, but simply express their admiration. Of course, in some cases, the fan economy and community economy can merge and coexist, depending on the individual members’ respective demands for the platform. Xiaomi Forum is precisely a BBS platform that integrates fan economy and community economy. There are marketing contents for Xiaomi fans, guided by the idea of fan economy, as well as interactive contents on technical and product issues. Marketing content is undoubtedly a faneconomy way to increase fans’ desire to buy, while feedback posts and technical outlook realize the communication between members and the community subject, i.e., Xiaomi. Users directly provide Xiaomi with a sample of problems and expectations by giving feedback on product problems and looking ahead to new products, thus enabling Xiaomi to make targeted improvements and research and development of products to achieve greater market gains. The operation and maintenance method of the subject account The operation and maintenance method of the subject account is also an important marker to distinguish the fan economy from the community economy. The subject account of a community gains value by serving community members, and its focus is more on establishing and maintaining the communication platform. The main operators of the account are usually community members (who spend their spare time to maintain and expand the platform), and community members will also join the content maintenance spontaneously, publish content related to the community subject and interact with other members. Therefore, community accounts are also characterized by a high degree of randomness. In some social media, communities do not exist in the form of accounts because they carry more platform functions, such as Baidu Tieba and

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forums. In contrast, the subject account in the fan economy is responsible for information release and transmission, so it will hire a person or a team at an affordable cost to maintain the subject account, produce content, and choose the right time to release it. Therefore, the maintenance of the subject account of the fan economy follows a certain program and operation rules, and extends to related industries due to its demand. However, as the popularity of the community increases and the number of community members grows, the economic benefits of the community gradually emerge; in order to meet the daily operation needs, the subject account also employs full-time maintenance staff. This is when it begins to resemble somewhat the subject account of the fan economy, in which case it is necessary to screen and judge by the purpose of the subject account’s operation. 8.3

Current Situation and Outlook of Community Economy

Given the late start of community economy in China and the relatively independent and scattered communities, the economic value of the community itself has not been effectively developed within the community due to the lack of professional operators and teams. More often than not, the social media platform where the community economy is developed is used to push advertising based on market segmentation in order to gain profit. This is one of the more mature directions of communityeconomy development. Platform providers of community accounts screen and divide community subjects and members for one-to-one and oneto-many advertising push, thus gaining higher value-added revenue than conventional advertising revenue. The social software MOMO pushes relevant advertisements for group members according to the characteristics presented by the group information tags, and adds e-tailer interface on the basis of such advertising push to introduce e-tailers and open the e-tailer-to-customer channels, thus earning relevant revenue. This mode of linking platform users and offline business networks has also become the main direction for major platform providers to expand the community economy in recent years, but this development completely leaves behind the community as an economic carrier, and the essence is to add value by exploiting the value of the accounts gathered by the community. Take the auto forum “Auto Home” as an example, it launched apps such as Car Care Home with the help of forum user scale and auto reviews, and introduces the interface of offline car maintenance

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service providers to provide car maintenance and parts sales online, so as to obtain the cash flow from online transactions. From a broader perspective, the Auto Home forum itself is a large community of car users and enthusiasts. However, in the narrow sense, the actual existence of the community is subdivided into forums, and the communication and sense of belonging of the community members are mostly concentrated in the subdivided forums. Therefore, it is actually biased to replace the value-added effect of community with the value-added effect of user aggregation. A more preferable approach is the community-economy model of P1, the fashion forum introduced at the beginning of this section. It leverages the brand value of the community to capture the economic value for community members and prospective community members. The economic value is generated by the community members’ perception and positioning of the community, and the value is added around the community itself, rather than using users to build a platform to attract cash flow. Community members will naturally explore the brands while paying attention to the dressing style presented by the street snap. At this time, the brand promotion contents introduced appropriately in the form of posts and introductions can obtain advertising revenue without offending the community members; furthermore, the development of the community economy is realized by displaying photos and photo software according to the members’ demand for the community subject (here is fashion). How to transform the fan economy into a community economy is an important issue in today’s environment. When fans are deceived by the sense of community identity created by the pseudo-community propaganda, the real community will be questioned by the victimized fan base, which will cause the society to lose some of its confidence in the community. In addition, the centripetal force brought by the strong aggregation effect of fan economy facilitates economic benefits, which makes the transformation from fan economy to community economy a shortcut to develop community economy. Based on the previous analysis of the differences between the community economy and fan economy, we believe that the core of transforming fans into community members in social media, and thus transforming fan economy into community economy, is to enhance the interaction and communication between groups, increase value recognition, and enable groups to have a sense of engagement beyond that of information receivers.

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Google’s modular phone is an important means to transform Google Android fans into community members. After going through the iteration period from non-smartphones to smartphones, Google and Apple each formed their own fan base, but the consumption habits of product users under such a fan economy rely excessively on the worship of brands, while the introduction of modular phones allows Android fans to freely configure cell phone modules and play different tricks. After satisfying fans’ hands-on needs and personalized demands, further satisfying social needs is undoubtedly an important demand of fan groups, who expect to have in-depth and self-aware conversations on the product among fans and among different fan groups. This in effect makes up for the shortcomings of the fan economy, which relies on vertical information transmission and neglects horizontal communication among fans. By migrating the fan base to the community while maintaining the value of the fan economy, the community economy can be effectively developed and the spontaneity and high awareness of community members can further prevent the loss of fans. The above is a brief description of the profit model and development strategy of community platform providers. However, more small and medium-sized communities are still operating individually, and are difficult in developing the economic value. For this reason, we need to focus on the nature of the community and provide value-added services for community members by taking advantage of social media’s spatial and temporal convenience.

Mutual Enhancement of Red Packets and Social Networking---In-Depth Analysis of WeChat Red Packet Design

9

Due to the activities of people on social platforms, the relationship between social and red packets has gone one step further—from red packets enhancing social in the past, to social can also enhance red packet gifting.

In September 2005, Tencent established Tenpay, an online payment platform, to provide payment and collection services for online transactions. Subsequently, Tencent launched financial services (such as wealth management products) one after another with Tenpay as the mainstay. With the rapid growth of WeChat users, WeChat launched its mobile

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payment function on Tenpay’s payment transaction system in 2013, enabling users to use debit cards and credit cards from many domestic banks to complete online and offline payments through WeChat Wallet. In early 2014, QQ Wallet was embedded in Mobile QQ to make up for WeChat’s market share gap in lower age groups as well as lower tier cities at the time.16 However, before the emergence of WeChat Red Packet, WeChat Pay mainly played the role of a financial payment tool. The introduction of WeChat Red Packet brings two major advantages: gamification and ease of transaction. Without the recipient’s bank card number, users can complete the transfer in the dialog box, which compresses the steps of traditional transactions significantly and can stimulate transactions between users. Unlike Alipay, WeChat Red Packet does not have to be intermediated by goods, and the rapid transfer or payment is done on the social account, which undoubtedly expands the imagination of online payment. So, the role of WeChat Red Packet is not only to gather more users, but also to showcase a killer function. According to statistics for 2015, QQ and WeChat, the two social products of the Tencent Empire, together consume an average of 29% of a user’s time every day.17 With the viruses-like spreading by over 700 million WeChat users,18 it can send billions or even tens of billions of messages per day. If we consider WeChat Red Packet as a communication medium, the conversion effect at its peak is amazing. 9.1

Social + Payment

In 2014, WeChat Red Packet came out of nowhere, with the help of the socialization of acquaintances, small circle socialization, and the new 16 CICC. Tencent Holdings: Connect the Dots to Build a Social-based Business Empire. http://img.zhitongcaijing.com/pdf/20180416/20180416180849_28772.pdf. Apr. 16, 2018. 17 Wenting Zhai. How to Capture Users? Tencent’s Art of Age Regression. China Entrepreneur. http://www.iceo.com.cn/com2013/2015/1105/300304.shtml. Nov. 05, 2015. 18 Tencent’s 2016 quarterly report shows that WeChat’s combined monthly active accounts reached 762 million. WeChat Hits 760 Million Monthly Active Users, Almost Catching up with QQ. TMTPOST. https://www.tmtpost.com/1712130.html. May 19, 2016.

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trend of mobile payment, reached the effect that Alipay had accumulated in several years within a few days after its launch. It smoothly entered the mobile payment market and grabbed a large piece of cake from Alipay. Tencent then launched QQ Red Packet, forming a double attack on Alipay. Alipay accepted the challenge, and Baidu joined the fray, resulting in the rapid popularity of Internet red packets. As of January 2016, the penetration rate of Internet red packets among urban mobile Internet users reached 89.5%.19 The core of Internet red packets lies in the strong relationship chain of social products, and the strong relationships between Internet friends is the basis for the rise of Internet red packets. According to How do Chinese Snatch Red Packets? An Exclusive Study of the Internet Red Packet Report published by Penguin Intelligence in February 2016, most users first came into contact with Internet red packets through social platforms. Among them, 80.8% of users started their Internet red packet journey with someone they trusted. What is more, through a kind of proliferation process, red packets have also accelerated the penetration of smartphones in rural and elderly groups.20 One of the major advantages of WeChat Red Packet is its built-in contagion property, i.e., users will actively or passively invite more users to participate in the game. But the proliferation of the application is also inseparable from the careful design of the Red Packet design team. The “Shake to Snatch Red Packets” campaign at the 2015 Spring Festival Gala is an important milestone in the history of WeChat Red Packet. According to the WeChat Pay team, before the 2015 Spring Festival Gala, WeChat Red Packet was experiencing very slow user growth, but very high retention. “So the fans are active, while others stand far away.” For this reason, the WeChat Red Packet team decided to take the opportunity of the Chinese New Year to give more users a “first time” experience. A survey found that 91% of users were receiving red packets in the first time experience, so the way to stimulate user interest was to “send money.” So, WeChat Red Packet started to distribute money, consumer coupons, etc. to participants. This design cleverly leverages the attributes of social 19 Peng Yang. Big Data Interpretation: The Secret of the Red Packet Battle in China. Tencent Technology. https://tech.qq.com/a/20160229/008778.htm. Feb. 29, 2016. 20 Penguin Intelligence. How do Chinese Snatch Red Packets? An Exclusive Study of the Internet Red Packet Report. Tencent Technology. https://tech.qq.com/a/201 60210/004834.htm#p=1. Feb. 10, 2016.

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circles and the contagion of relationship chains, successfully triggering a chain reaction within the circle of friends.21 Interestingly, red packets started with strong links, but then made their mark on weak links, acting as a catalyst for building and maintaining social circles (see later). From a payment perspective, Internet red packets are a mobile payment product. Sending and receiving red packets, ostensibly, allocates specific or random amounts to others, but their strategic significance lies in expanding the mobile payment scene through social consumption and laying the foundation for the full application of mobile payments. When you open the WeChat Pay interface, the three major functions, Payment, Wallet, and Bank card, are clearly visible (later modified to two major functions, Money and Wallet). Under Tencent services, there are Credit Card Repayment, Loan, Mobile Top Up, Wealth, Utilities, QQ Coins, Public Services, Tencent Charity, Health, and other services; under third-party services, there are Ride Hailing, Rail & Flights, Featured Products, Movie Tickets, Group Buys, restaurants, Pinduoduo, Used Goods, and so on, encompassing almost every aspect of consumer life. Previously, Alipay Wallet has covered offline payment scenarios such as restaurants and retail. And Alipay’s online scenarios, including Yu’E Bao (an Internet fund specially designed for Alipay), top-ups, money transfers, credit card repayment, lotteries, trip tickets, membership cards, and e-coupons, were also popping up. In contrast, WeChat Pay was launched in August 2013, a late start, and there was a relative lack of mobile payment scenarios, both online and offline. Such being the cases, WeChat Pay launched the Red Packet function, breaking the absolute monopoly of Alipay and changing the market pattern of mobile payment in China, which was described by Jack Ma as “an attack on Pearl Harbor.”22 Compared with Alibaba, Tencent did not have an advantage in mobile payment, as e-commerce are naturally linked to payments, while social

21 Pengfei Wang. Red Packets: Reflections on User Experience under Different Product Phases. Tencent University. https://daxue.qq.com/content/content/id/2307. Dec. 25, 2015. 22 An Insight on the WeChat Red Packet’s “Attack on Pearl Harbor.” The Times. http://money.163.com/14/0213/06/9KUMSIM500252H36.html. Feb. 13, 2014.

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networking lacks a corresponding payment scene. In the end, the emergence of the Red Packet created the largest payment scene for social networking, and Tencent’s attempt to connect social and payment is the leading one in the world. By December 2016, Tencent’s monthly active accounts and daily average number of payment transactions exceeded 600 million, and they are still rising. That number surpassed 800 million in June 2018,23 making Tencent another strong force in the mobile payments market. In the 2016 Chinese New Year, the number of participants of WeChat Red Packet campaign on New Year’s Eve reached 420 million, and the total number of red packets sent and received reached 8.08 billion, eight times the 1.01 billion on the same day the previous year. On New Year’s Eve, the participants’ number in QQ Red Packet reached 308 million, with a total of 4.2 billion packets sent and received. Among the users who participated in QQ Red Packet campaign, “post-1990s” accounted for more than 75%. The total number of WeChat red packets and QQ red packets sent and received exceeded 12.2 billion.24 In contrast, PayPal completed only 4.9 billion transactions in 2015, of which mobile payments accounted for only 28%.25 WeChat Red Packet is cleverly conceived to allow users to experience mobile payment in a very pleasant and relaxed frame of mind. In the past, it took a lot of user education to tie up a card, but now with the red packet, the social chain greatly popularize mobile payment. And once a large number of users have experienced mobile payment, the promotion of more mobile payment businesses will be ready. Therefore, WeChat Red Packet is the starting point of WeChat mobile payment, and its end point is the throne in the O2O market. Of course, the popularity of WeChat Red Packet also paves the way for monetization of WeChat.

23 About WeChat Pay. Tencent Customer Service. https://kf.qq.com/faq/181012y6b UNR181012nMFnMr.html. 24 New Year’s Eve Witnessed Tencent’s Red Packets Reach 7.5 times Last Year’s. Tencent Technology. https://xw.qq.com/tech/20160208012580/TEC201602080125 8000. Feb. 08, 2016. 25 PayPal Reports Strong Fourth Quarter and Full Year PayPal. https://investor.paypal-corp.com/newsreleases/news- release reports-strong-fourth-quarter-and-full-year-2015-results. Jan. 27, 2016.

2015 Results. -details/paypal-

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WeChat Red Packet as a Social Lubricant

In 2014, WeChat moved the traditional New Year red packet from offline to virtual space for the first time. New Year red packets are a form of Chinese gift money, usually given to children by their elders. Since the first day of WeChat Red Packet’s launch, users have engaged with it more as a game, although it also contains actual economic value. As a game, red packets are a kind of random feedback similar to lottery, and it is easy for users to get caught up in it. This fun is not affected by the amount of the red packets. In fact, in real-life social contexts, people have an agreed-upon threshold for gifts, which is very different from the low threshold of WeChat red packets. This suggests that people expect more social pleasure from WeChat red packets rather than traditional reciprocity. In addition, the exchange of WeChat red envelopes occurs more often between friends and relatives of the same age, rather than just from elders to children. With the popularity of WeChat, it has gradually transformed from a community of acquaintances with relatively fixed followers and long acquaintanceship to a community of strangers based on common interests or with common purposes, i.e., from strong to weak links. In weak-link socialization, WeChat red packets often serve as a lubricant. For example, when a new member joins a WeChat group, a red packet is used to present a “meet and greet” gift to the senior members; the group leader is often asked to send red packets to keep his social leadership status confirmed; if a group is too silent, red packets can be used to liven up the atmosphere; and when group members are in conflict, red packets can also be used to relieve tension or to distract attention. In addition, red packets can also be used to make donations, rewards, etc. on specific matters. Red packets have thus become an effective intermediary and tool for community activities. From WeChat red packets, we can reflect on the social meaning of money. In the West, money has traditionally been seen as an impersonal medium, applicable only in business, in which social relations play a mainly functional role. In The Philosophy of Money, Georg Simmel argues that money can never be an “effective mediator of personal relationships.” As he puts it, “A gift in the form of money more clearly alienates and estranges the giver from the gift.”26 In the West, a “perfect” gift should 26 Viviana A Zelizer. The Social Meaning of Money. Princeton University Press. 1997.

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undergo a careful selection process. But in China, money has long been considered the “perfect” gift because it can be used to buy whatever the recipient wants to buy, and therefore eliminates unnecessary risk in choosing a gift. To put it simply, the Chinese are used to expressing care and love in social relationships in terms of money. Thus, in the case of WeChat, rather than being a monetary force, the red packet is a social force that shows us the ways in which money may be transformed from financial capital to social capital in a specific social context. WeChat Red Packet started out based on acquaintanceship and served to cement strong relationships, but slowly, it made it possible for some dormant relationships to be activated by the lubricant nature of red packets. It also plays a role in maintaining community in the midst of unequal relationships—for example, between celebrities and fans, and between businesses and users. All of this demonstrates the openness of WeChat Red Packet as a mobile social product. The key aspect of this is that while the product is developed and designed by the platform, the end use is laid down by the users in the process of using it. An interesting example is that on May 20, 2015, the WeChat team noticed that users suddenly started sending red envelopes of 5.20 RMB, so WeChat raised the cap on the amount of red envelopes to 520 RMB for one day. Due to the activities of people on social platforms, the relationship between social and red packets has gone one step further—from red packets enhancing social in the past, to social can also enhance red packet gifting. This dialectical relationship between the two is also evident from the countermeasures taken by Alipay in the face of the WeChat Red Packet offensive: Alipay intends to build social networking through red packets—the number of friendships reached is considered an important indicator for Alipay red envelopes, which is intended to build a relationship chain, and emphasizes that it is a relationship chain integrated with life scenarios. As you can see, the Internet red packet has developed into a new medium for interpersonal interaction and emotional communication, and its social significance has been strengthened, with the amount of money taking a back seat. 9.3

The Cultural Soil of Red Packets

The virtual society is built on the foundation of the real society, and one of the major reasons for the popularity of WeChat Red Packet is that it has brought the deep-rooted Chinese rituals to the mobile Internet.

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In the 1940s, Fei Xiaotong proposed the concept of “acquaintance society” in his book From the Soil: The Foundations of Chinese Society, arguing that China has a social structure based on consanguinity, kinship, and local ties, as a result of Chinese civilization’s roots in a subsistence farming culture. “In a vernacular society, the mutual behavior of individual people is matched by intimate and long-term common life, and social ties are long-established and familiar, to the extent that they feel automatically generated.”27 An important part of “long-established” social ties is gift-giving, which covers ceremonial occasions such as birth celebrations, birthday celebrations, weddings, house building, and funerals, as well as non-ceremonial situations such as daily visits and visits to the sick. The sociologist Yan Yunxiang divides the Chinese view of gift-giving into two categories according to the difference in the purpose of giftgiving and social relations: the gifts given between friends and relatives at weddings and funerals are considered “expressive gifts,” which aim at gift exchange and reflect the long-established social ties between the gift-giver and the recipient; while those given to certain superiors, especially the bigwigs, are regarded as “instrumental gifts,” which are utilitarian in purpose and bring short-term benefits. There is often a “social pressure” to exchange gifts within social circles, whereas instrumental giftgiving outside of social circles does not usually cause such psychosocial pressure.28 Interestingly, WeChat red packets play the role of both expressive and instrumental gifts, although there are subtle differences between them and offline gift-giving activities. The expressiveness of WeChat red packets is reflected in reciprocity and mutual benefit. For example, in WeChat work groups, superiors often send red packets to encourage subordinates to work actively. The instrumental nature of WeChat red packets lies in the utilitarian exchange. For example, it has almost become customary to send red packets to friends in WeChat groups when users ask for post forwarding, likes, votes, etc. The difference between online and offline gift-giving described above is firstly reflected in the difference in the identity of the gift-giver and the 27 Fei Xiaotong. From the Soil:The Foundations of Chinese Society. Beijing: Peking University Press. 1998. 28 Yan Yunxiang. The Flow of Gifts: Reciprocity and Social Network in a Chinese Village. Shanghai: Shanghai People’s Publishing House. 2000.

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recipient. According to Yan Yunxiang’s thesis, in traditional gift-giving activities, the number of gift-givers is greater than the number of recipients, resulting in the accumulation of gifts in the hands of the upper class; at the same time, the recipients often maintain high positions of social power, so they do not return the gifts. In contrast, in the case of WeChat red packets, it is often those who maintain high social status who need to send red packages to “show their goodwill,” which reveals that the social hierarchy on social networks is flatter and people have a greater sense of equality. Second, mobile social networking plays a role in expanding relationships while maintaining existing ones. As acquaintance society slowly turns into semi-acquaintance society or stranger society, the expressiveness of the gift-giving activity decreases and the instrumentality slowly increases. WeChat red packets are increasingly becoming a resource and a medium of social exchange, still displaying “social” attributes, but tending to be more rational in specific contexts. 9.4

Conclusion

Since its introduction, WeChat Red Packet has become a category of WeChat content, i.e., another form of communication in addition to text, voice, and emoticons. In many WeChat groups, there is a saying circulating: “Things that can be solved with red packets should be solved with red packets.” This is of course a joke, but red packets do play a role that other communication methods cannot achieve, and have given rise to more ways to play. WeChat founder Zhang Xiaolong says that on average, each user enters the WeChat Moment about 30 or 40 times a day. “This is an iterative process. We want the user to see what he wants to see every time he comes in, rather than constantly swiping the screen.”29 WeChat is still in the process of exploring content, and the exploration of WeChat Red Packet is only part of the overall action. We see that on a platform with hundreds of millions of active users, even a small attempt can brew big changes. “People are rarely fortunate enough to witness the

29 Zhang Xiaolong: Good Product Is Not to Stick to the User. Tencent Technology. https://new.qq.com/rain/a/20160111030007. Jan. 11, 2016.

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butterfly effect in person, but on top of a platform like WeChat, it really happens instantly.”30

10

Intention Economy---Seller Beware

When marketers are trying to increasingly build personal relationships with consumers, consumers are beginning to personalize themselves using their own tools and in their own ways, telling the market at large what they need, how they need it, when and where they want it, and at what price.

10.1

Not Attention Economy, But Intention Economy

It is becoming increasingly clear to business communicators that traditional advertising is low quality and inefficient in this day and age. The massive, widespread bombardment that is the norm in the advertising world often fails to achieve the desired results because of poor purpose and weak targeting. The intention economy has emerged to solve this problem in traditional business. The intention economy refers to an orientation that sees the buyer as a scarce commodity and thus forms a market and economy around it. Consumers’ intention to buy drives the supply of products and services to meet their specific needs. The intention economy is derived from the title of a book by Doc Searls—The Intention Economy: When Customers Take Charge (published in May 2012).31 Searls says, “The intention economy evolves around buyers rather than sellers. It exploits the simple fact that buyers are the first source of money, and they are fully prepared. You do not need to advertise to produce buyers.”32 Searls developed this concept out of his strong dissatisfaction with the prevailing notion of the attention economy—a notion that is on the side 30 Zhang Xiaolong’s Speech Transcript: What Are the Principles of WeChat’s Rule-

making? Tencent Technology. https://tech.qq.com/a/20160111/028515.htm. Jan. 11, 2016. 31 Doc Searls. The Intention Economy: When Customers Take Charge. Xiaoyu Li, Mei Gao (trans.). Beijing: Electronic Industry Press. 2016. 32 Doc Searls. The Intention Economy. Linux Journal. https://www.linuxjournal.com/ content/intention-economy. Mar. 8, 2006.

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of the seller. The “attention economy” is just another name for the way advertisers attract attention. There is an old saying in advertising: “I know half the money I spend on advertising is wasted, I just do not know which half.” Searls says the wisecrack is not accurate—almost all advertising is wasted. So the intention economy sides with the buyer, going against the attention economy. It is about buyers finding sellers, not sellers finding (or, more accurately, capturing) buyers. In the intention economy, buyers publish information about their needs and intentions to sellers through the digital media, and businesses then compete around consumers’ purchase intentions. The concept is based on the timely discovery of and response to consumer needs constructed by technology and networks. The intention economy points to the market, not marketing. You do not need marketing to create an intention market. Searls describes the current market as a series of silos where the only option a buyer has is to move from one silo to another. The intention economy is built around a truly open marketplace, where customers no longer have to fly from silo to silo like flower-picking bees, harvesting a bunch of transactional information in the process (and inevitably encountering exaggerated sales pitches). In the intention economy, buyers inform the marketplace of their purchase intentions, and sellers compete for the orders placed by buyers. It is simple. The intention economy is based on more than just transactions. Conversations matter, so do relationships, reputation, authority, and respect. But these virtues are acquired by the seller (and the buyer), not just “labeled or branded” by the seller in the buyer’s mind. The word “brand” was precisely originated in this sense. According to US marketing experts, the English word “brand” originated in the nineteenth century, when cattle from the Midwest ranches of the American continent had to be driven to Chicago for slaughter in a unified herd; in order to easily identify the source and avoid confusion, each cow had to be marked with a branding iron —this action is called “brand.” Sears is insinuating whether we still need this word borrowed from cattle farming. Citing an example from one of his favorite cartoons, he said, “If you talk to people like you do in ads, they are bound to punch you in the face.”

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Tell the Market What We Consumers Want

From there, we have to start looking at the market and the economy upside down—from a single buyer to the world of sellers around them— and start building technology solutions that address the buyer’s need for a product, rather than addressing how to get the buyer’s attention. What is the realistic underpinning of this upside-down worldview? It is the information technology that makes possible the convergence of individual consumers and empowers them as never before. It is a matter of aggregation in a decentralized market. Just as anyone can have a blog, every blogger can be a member of a blogging consortium, everyone can display much of their content, and by aggregating all of this together, they can compete with mass communication media. We can think of intention economic activity as something similar to this. Consumers are able to organize themselves with unprecedented efficiency and scale through the Internet, and economic power is beginning to shift to the consumer side. The Internet gave consumers powerful organizational tools. Searls argues that the “Buyer Beware” mantra has been transformed into “Seller Beware” after a critical shift in power from the seller to the buyer. Searls points out that the current seller-controlled market is still large. Therefore, whether we need it or not, the seller’s first priority is to convince us to buy its products and services. Although the Internet has given consumers sovereignty, the company is still seller-oriented. Even successful companies like Google and Facebook still take a seller’s view, and their revenues come almost entirely from advertising. But when marketers are trying to increasingly build personal relationships with consumers, consumers are beginning to personalize themselves using their own tools and in their own ways, telling the market at large what they need, how they need it, when and where they want it, and at what price. In his article, Searls cites the case of “team purchase” in China as a typical model of the intention economy. Strangers organize themselves around a specific product or service—electronics, household goods, cars, etc.—and together they negotiate with a seller for a discount at an offline or online store on an agreed date. It follows that the realization of the intention economy requires strong consumer organization. Of course, the idea of people using the power of the group to meet their own expectations is not new. What is truly new and exciting is that a large number of like-minded consumers can easily organize themselves through the Internet and exert influence on a global scale.

CHAPTER 6

One Step Ahead: On China’s Practices

1

Chinese Strategists

Developing strategy is like playing chess. The strategy of the outstanding entrepreneur is to leap forward dramatically in the face of uncertainty.

To be a strategist, Chinese entrepreneurs must possess the following attributes. First, to have an insight into policies. It is difficult for an entrepreneur or strategist to develop a strategy without understanding the policy orientation of the authorities. Policies are often complementary to laws. Laws, given their continuous stability, should not be often revised and changed, while government’s public policies, with their flexibility and variability, can often make up for the shortcomings of laws. For historical reasons, not all of China’s industry policies are publicly transparent. Unlike policies with high public transparency that are explicitly announced through industry regulations and other documents, some policies are communicated to subordinates in the form of internal documents or oral reports for implementation, which lack public transparency. At the same time, policies are often adjusted in the complex and changing landscape of the transitional society. Second, to recognize that the priority of the strategy is to actively seek new opportunities. The primary task of an entrepreneur-led organization is to seek opportunities, and problem-solving is a secondary © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 Y. Hu, Seismic Digital Shift, https://doi.org/10.1007/978-981-99-5953-2_6

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task. As Drucker said, the people who have the ability to grow into entrepreneurs are those who are exceptional, talented, and able to identify opportunities and seize them, not those who spend their time on so-called problem-solving.1 Larry Bossidy, a leading US business leader, has a different view. As the author of the best-selling book Execution: The Discipline of Getting Things Done (2002), Bossidy believes that organizational leaders must be active performers. Bossidy criticizes leaders who attribute execution to tactical issues for “always assigning tasks to others, while mistakenly believing they should devote their energy to ‘bigger’ things.”2 This may also be part of paradoxical management. Leaders need to move from “either/or” thinking to “both/and” thinking. As Steve Jobs says in his biography, some leaders drive innovation by taking the big picture and some by taking care of the details. Steve Jobs did both and worked tirelessly to do so.3 Because of this, he launched a series of products that changed so many industries over the course of 30 years. Jeff Bewkes, then CEO of Time Warner, praised Jobs for being both a strategic thinker and a master of the smallest details, “ready to move from the overarching principles into the details.”4 It is important to note that what sets entrepreneurs apart from ordinary people is their ability to see opportunity from what ordinary people see as problems. In contrast to the ordinary people’s indifference to opportunities, entrepreneurs only see the size of the opportunities in their eyes. Third, to be good at moving forward by making big decisions. The strategy of the outstanding entrepreneur is to leap forward dramatically in the face of uncertainty. Entrepreneurs look for uncertainties, thrive on them, and lead their organizations to reap rich rewards from those uncertainties. At the same time, they also bear the risk. The case of “overtaking” was used by a well-known company leader to describe the process of making 1 Peter F. Drucker. Innovation and Entrepreneurship: Practice and Principles. Harper & Row. 1985. 2 Larry Bossidy, Ram Charan. Execution: The Discipline of Getting Things Done. Crown Business. 2002. 6. 3 Walter Isaacson. Steve Jobs. Simon & Shuster. 2011. 565. 4 Walter Isaacson. The Real Leadership Lessons of Steve Jobs. Harvard Business Review.

https://hbr.org/2012/04/the-real-leadership-lessons-of-steve-jobs. Apr. 2012.

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major decisions: “What is the actual process of decision making by business leaders? We used an example of overtaking to illustrate. When you’re driving a car on an S-shaped mountain road and there is a car in front of you. You have to decide whether to overtake it. If you choose not to overtake, you will have to stay behind it. If you choose yes, what should you do? Be sure to look at the road ahead and overtake decisively. If you act without a clear view of the road, the result will either be a fluke that you do not encounter an accident or a collision with the car in front of you. Leaders are always in this state of choice when making decisions.” Fourth, to determine growth as the primary goal. In an entrepreneurcentric organization, the purpose of the organization is simply a continuation of the purpose of the entrepreneur. According to psychologist David C. McClelland, entrepreneurs are driven first and foremost by the desire to make an achievement. McClelland proposed the theory of achievement motivation in his book The Achieving Society, published in 1967. He sought to explain why some societies are more economically successful than others. To find the answer, he looked at the entrepreneurial behavior of individuals, believing it to be the key to the development of all economies. He asserted that entrepreneurs do things in a new and better way and make decisions in the face of uncertainty. Entrepreneurial achievement is driven by the pursuit of excellence, progress, and growth. By focusing on the motivational needs of entrepreneurs, he challenged the thenpopular theories of the great man entrepreneur (Carlyle’s heroic view) and the religious entrepreneur (Weber’s Protestant ethical theory). He argued that entrepreneurship was learned and that such learning could be encouraged. The primary purpose of organizations driven by achievementmotivated entrepreneurs is growth, which is the most tangible expression of achievement. Growth can be measured in terms of employees, customers, revenue, liquidity, profit, geographic expansion, and many other dimensions. All companies experience growth, yet this period is turbulent for any company because growth is inherently unstable and carries more or less risks. In fact, there will always be obstacles that prevent growth. The willingness and ability to overcome these obstacles stimulate business growth. We can think of the will to grow as a sort of extension of entrepreneurship. Many companies stagnate because they are unwilling to take the risks associated with growth. While growth may seem risky compared to

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temporary stability, stagnation in high-tech companies increases the risk of failure. The best way to reduce risk is to innovate in the face of market changes. Of course, careful planning can also reduce risk. The ability to anticipate most of the risks involved in the future and successfully address them is also what allows companies to grow. The benefits of growth are numerous, including helping to establish legitimacy for the business and also creating new options for opportunity. Larger companies are less likely to fail and thus more likely to earn the trust of customers and investors. During and upon growth, companies find themselves most likely to gain access to capital. Companies that are considered to have crossed the initial start-up hurdle are perceived as stable. As the company grows in size, so does its profitability and liquidity. The company will then begin to have a history and its assets and financial goals will be more attainable than ever before. With growth, the company forms new connections and has the ability to enter new markets, which in turn leads to further increases in sales, profitability, and influence. Because of the volatile nature of growth, the entrepreneur as strategist must ensure that the company is flexible and adaptable during and after growth. Presenting a vision of the future to all those involved and developing policies can help mitigate turbulence. An entrepreneur cannot plan for all risks, but he cannot succeed without planning. The successful entrepreneur will acquire enough flexibility to deal with any problems that may arise, without losing focus on his long-term goals. Fifth, to rely on collective wisdom, but make decisive judgments based on that collective wisdom. In December 2006, as the editor-in-chief of the entrepreneurship reality show Win in China launched by CCTV2, I invited Zhang Ruimin to be the chief judge of the first season championship game. In his commentary, he emphasized a point: “Rely on collective wisdom to strategize but keep independent in decision making, deliberate carefully and act earnestly.” In entrepreneurial organizations, the authoritative entrepreneur is the one who can give the organization a clear direction of action. Entrepreneurs with personal abilities or personal charisma sometimes rely on collective thinking and group effort to drive the enterprise forward, and sometimes achieve strategic control through bold decisions and strong implementation. Zhang Ruimin believes that, as a business leader, it is necessary to resolve three difficulties: the most difficult decision to make—to make

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re-decisions after the right ones; the most difficult task to advance— to simplify complex issues; and the most difficult person to defeat— himself. He places special emphasis on continuing to make decisions after the right ones, meaning that the key path for entrepreneurs to gain authority is to lead the business from one victory to another. This led us to identify a key principle of strategic management: translate ambitious goals into a sum of milestones. Maintaining high growth rates is a daunting task, so a leader must convince his people to follow his adventures with full enthusiasm; it is not enough to boost morale and paint a picture of the future, but also necessary to inspire followers with a series of milestone victories to inspire confidence in the mastermind. From this, we can learn that tactical successes will have little meaning if they are divorced from the context of a strong strategy, while ambitious strategies will soon become empty if they do not lead to measurable progress in their implementation.

2 Liu Chuanzhi’s Dream of a Century-Old Company Truly great companies are not built by greedy people, but by passionate ones.

In 2000, when the Internet was on the rise, Sanlian Lifeweek once published the article A Dialogue between a Newbie and an IT Veteran, in which Gao Limin, a star of securities as the newbie, almost silenced the veteran Liu Chuanzhi with poignant views, “It is unprecedented for a traditional company to continue to lead in the new economy. I believe that enterprises such as Mr. Liu’s may no longer be the leader in the new economy. The rebirth of a company is currently only a beautiful ideal.” What is the basis of Gao Limin’s argument? He pointed out that every entrepreneur expects his or her business to live long, but the life cycle of a business in the new economy is only one-sixth of the original, which is a reality that must be accepted. Therefore, he sincerely issued a question: Does it matter how long a business lives today? In fact, he was suggesting that many entrepreneurs’ ideal of building a century-old company is simply a fantasy today. Liu Chuanzhi was not convinced. Soon, he caught a chance to fight back. The dot-com bubble burst, leaving the Internet landscape strewn

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with wreckage. At a press conference jointly held by Lenovo and AOL on June 11, 2001, Liu Chuanzhi said in a serious tone, “One of the reasons why Internet companies have come to such a miserable situation today is that they treat the development of the Internet industry as a sprint, with the listing as the end point. In fact, the construction of the Internet industry should be a long-term process, and the most important thing right now is to learn to run long distance.” The world has changed. Today, more than a decade later, many Internet companies are nowhere to be found, but Lenovo’s long run has not stopped, which seems to confirm Liu Chuanzhi’s foresight. However, with the new wave of mobile Internet coming, Lenovo was “broke” again in social media lore. On November 17, 2014, a fake news article on WeChat surprised Liu Chuanzhi. “The headline said ‘Lenovo is bankrupt’, a once prominent behemoth collapsed overnight. Liu Chuanzhi cried, paying a terrible price for his strategic mistakes,” followed by a decently long analysis of why Lenovo went bankrupt. In fact, in mid-November that year, Lenovo had just held an earnings conference, and the third quarter witnessed a flurry of good news, with not only another record net profit, but also a significant increase in market share. Mr. Liu was so struck by the contrast that he invited 10 prominent Internet entrepreneurs and observers to a closed-door meeting, perhaps to find out why Lenovo continued to be underrated. In fact, the reason was very simple. In the transitional era, companies that are dominant in an industry are considered incumbent by newcomers. They used to have the ability to set industry rules, dictate to users, and establish an image of authority. To catch up, newcomers are attacking not only the weakest points in established companies’ systems (such as dominating users rather than letting them dominate), but also overturning their towering image in order to compete for dominance in establishing new rules. Profit-seeking venture capital firms will drive this “start-ups make all the difference” narrative; the media, loving the new and loathing the old, will exaggerate the battle between the so-called emerging forces and the old guard. But it is also fair to say that the rigidity and old-fashionedness of the incumbents provides ammunition for the “shellacking” of the newcomers. For example, the once inspiring mission is now reduced to a banal slogan; the inability to deliver “wow” products is driving once-loyal customers further away; the spirit of innovation is stifled by internal bureaucracy; and so on.

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The course of business is not a simple drama of winners and losers. We have seen that the new economy, considered by many online entrepreneurs as an absolute truth, has also experienced hard times, while companies that took off with the wind of the new economy, such as Alibaba, have started to talk about “to build a 102-year old company.” So the charm of the dream of a century-old company does not fade easily. In fact, we are even seeing an increasingly mature environment that encourages the building of great and enduring companies, which will certainly include great and enduring venture capital firms. For one thing, today’s players are rational enough. It is hard to make good judgments when poor ones are rewarded by the insane Wall Street stock market. Today, start-ups are more focused and more aware of the importance of the bottom line, and these are healthy signs. Second, the “get rich overnight” mindset has brought many opportunists to the dot-com industry who do not have the will or patience to take businesses one step at a time. Truly great companies are not built by greedy people, but by passionate ones. The “hit-and-run” people are high profile but weak in substance, playing the lead role in a market stage temporarily set up for them, but they will eventually lose the opportunity to even play a bit role. Today’s marketplace is increasingly shifting toward an effective filter that allows those who are truly passionate about entrepreneurship to stand out and screens out those who are driven by money. Over the past years, excessive capital availability and over-optimism have led to an over-inflation of competitors. And as the market corrects itself, the winner will win more of the spoils. Companies that know how to adjust themselves quickly and accumulate capital effectively will find themselves in an unprecedentedly favorable position. Players found swimming naked after the ebb tide are eventually abandoned by users. Even the underlying environment is working in their favor: good service companies are no longer as scarce as they once were, and people who were originally made to suffer by the free model on the Internet are finding that users are increasingly willing to pay for good things. This is not to say that all the pain is becoming a thing of the past, and there is still much work to be done by companies aspiring to reach greatness and longevity. But when it comes to building great companies on a solid foundation, there are clearly more opportunities today than yesterday. Liu Chuanzhi said, “Whether you are engaged in the

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new economy or the traditional economy, there is a reason for a business to exist. A company with a good strategy and a good management system can move forward. It is the management, strategy, and management structure of the company that determines its future, not whether the economic system is new or old.” He insisted that his three-step management method, “build the management, set a strategy, and lead a team,” is still applicable today. These words are taken as axioms by many people and also constitute a reason for others to underestimate Lenovo—it is the Internet era, and he still keeps the old scriptures of the personal computer era to talk about the management of network enterprises. In fact, there is no point in talking about Liu Chuanzhi’s so-called three-step management method at this level, because it is about faith, and faith is beyond dispute. Do you believe that every entrepreneur always has something to believe in, and this is sacred, eternal, and sustainable in his or her business? Speaking of faith, Liu Chuanzhi talked about his original intention of running the business in the “closed-door meeting.” “I think the first thing is to make life better for me and the people around me, and then for Lenovo’s employees, the people I am trying to protect, or stand with me. On the basis of the completion of this, it is to fight for the glory of China. The next thing is to do it for all of humanity. Indeed that is my true idea.” While this is certainly true and represents a responsible attitude to the present, we can read from these words that the real mission is still so far away from Chinese companies. However, the mission is the first priority to build a century-old company. Ultimately, an overly narrow definition of company affects not only the company itself but also the social environment in which it lives.

3

Make Employees “Internal Entrepreneurs” Haier’s MEs (microenterprises) and EMCs (Ecosystems of Micro Communities) are not purely a management innovation of a company, but a social invention.

“Execution” was once a magic word among Chinese manufacturing companies. “Hon Hai’s culture features both severe execution and

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high motivation,” Cheng Tianzong, Vice President of Foxconn Technology Group once told reporters.5 Qingtong, a former supervisor from Foxconn, said her understanding of Foxconn’s corporate culture is “execution.”6 It happens that there are similar cases. The founder of BYD, Wang Chuanfu, also said, “At BYD, people are the ultimate executors of every key node and every strategic play. For workers, the combination of high pressure and high pay can have an immediate effect on productivity.”7 What do Foxconn’s Terry Gou and BYD’s Wang Chuanfu have in common? They believe in the same philosophy of motivation: there is no one who does not love the carrot and fear the stick (although Wang Chuanfu realizes that engineers must be treated differently from workers). People respond shrewdly to these two things, and their behavior is dependent on a series of stimuli and extrinsic rewards. People who believe in this philosophy tend to question doing something for the love of it, or trying something because it is right. The extremes even see corporate social responsibility as some sort of disguise for self-interested behavior. 3.1

From “Instinct” to “Meaning”

The opposite of this philosophy is to recognize the human instinct to avoid harm, while believing that people are human because they yearn for belonging, for meaning, for great love, or the blessing of a new baby. The greatest opportunity for the world today lies in the social inventions that allow people to live lives that allow them to realize their full potential. Every human being has great potential to do good, to see, to create, to show love, and to work. But unfortunately, today that potential is deeply limited by large, hierarchical organizations.

5 Ru Fang. Terry Gou: Money Can Fix Everything? Beijing: China Development Press. 2011. Chapter 4, Section 3. Hon Hai Precision Industry Co., Ltd., trading as Hon Hai Technology Group in China and Taiwan and Foxconn internationally, is a Taiwanese multinational electronics contract manufacturer established in 1974 with headquarters in Tucheng, New Taipei City, Taiwan. 6 Foxconn’s “Iron-Blooded Culture”. Huashang News. http://it.people.com.cn/ BIG5/42891/42893/11622884.html. May 18, 2010. 7 Shenghai Yu. Wang Chuanfu: Building an Industrial Myth. New Chinese Businessman. http://finance.ifeng.com/leadership/jdrw/20091214/1579830.shtml. Dec. 14, 2009.

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Zhang Ruimin famously said, “In the end, enterprises are the embodiment of individuals and management provides better leverage” From this perspective, Haier’s current diligent management transformation to create MEs (microenterprises) and EMCs (Ecosystems of Micro Communities) heralds a great shift from execution to creativity. In other words, Haier pursues something different from Foxconn and BYD: not to treat employees as purely a tool for execution, but to give them more space allowing for autonomous self-development—not only self-sufficiency but also forming this self-sufficiency in collaboration with others. If execution still applies to the new environment, it must be, as Zhang Ruimin said, “to execute not the instructions of superiors, but the requirements of users.” 3.2

Get Rid of Purely Contractual Relationships

Haier’s MEs are self-starting, self-organizing, self-driven business units, holding the right to make decisions, allocate money and use human resources. The team member s gather and disperse according to user needs—come together if they can create value for users, and disband if not. The MEs are autonomously combined into solution EMCs and experience EMCs, with the latter transmits user feedback to the former. The experience EMC functions as the user touch point. They know who their users are, where they are, what they want, and how to get in touch with them. It is their responsibility to figure out the user’s “pain points” and needs. The solution EMC, as the name suggests, is responsible for creating solutions. MEs on the solution side design, create, produce, and transport products that address user “pain-points.” The two types of EMCs are fused together with iteration of the user’s scenario application experience as the center to jointly meet the user’s needs. The formation of EMCs is corresponding to Haier’s move from providing product and service packages to now selling “scenarios” and “user experiences,” i.e., “total solutions.” EMCs can be understood as “groups of microenterprises on the ecological chain,” where the microenterprises are the basic units of the EMCs; and they are independent of each other in a nonlinear parallel relationship. The EMCs are open to all world-class resources, and they are also dynamically reconfigured, iterated, and upgraded according to the users’ needs. The EMC has neither a center nor a leader, and like MEs, is completely self-organized and

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self-driven, and can be continuously optimized to achieve self-value and self-evolution. Marshall Meyer, a professor of management at Wharton, came to Haier with a Western management perspective to pursue the essence of Haier’s organizational experiment. He tried to analyze it using the contract theory of the firm, which defines the firm as a combination of a series of contracts that can occur between the firm and the external market or within the firm. What plays a key role in such a firm is the relationship between the principal and the agent. However, he made many new discoveries at Haier. For example, he found that MEs are a form of competitive bidding, and the winner is the one who comes up with a better path and solution to achieve the goal, and then link this goal to the compensation; another example is that the evaluation of MEs is not entirely measured by sales, but more by market share and profitability, including new product development, customer satisfaction, etc. His biggest finding was that unlike Western companies where the principal-agent contract is static and never changes after it is signed, in Haier’s model, the contract is dynamically adjusted multiple times. This suggests that Haier’s approach is not a simple principal-agent relationship. The traditional principal-agent relationship can be seen as a game between a principal and an agent, where in the first stage the principal provides a mechanism arrangement. In the second stage, the agent decides whether to accept the mechanism or not. If the agent refuses to accept the mechanism, nothing happens, but if he accepts the mechanism, he enters the third stage of the game—the agent chooses to act in his favor under the constraints of the mechanism. However, this is precisely the game that Zhang Ruimin tries to avoid: the non-cooperative game in the company cannot achieve a win–win situation, because people can always find countermeasures to cope with the policies above, either the enterprise loses, the employee wins; or the enterprise wins, the employee loses. The MEs and EMCs try to turn the game between employees and the company into one between themselves to meet the needs of users. Zhang Ruimin told Professor Meyer: “A big difference between Haier and Western companies is that, in essence, Haier is creating a contract between the company and the user. It satisfies whatever the user needs, and there is no such contract within this enterprise that leaves the user aside. To put it simply, the contract within the company is also a contract between the company and the user in order to meet the user’s needs.

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We are a user-centered company, while Western companies are enterprisecentered companies.” This is also the meaning of the so-called dynamic contract: all MEs are not subject to the instructions by the company, but to the requirements of the user. 3.3

From Management Innovation to Social Invention

I do not know if Zhang Ruimin’s statement has enlightened or confused Professor Meyer, who follows the Western management path. In my opinion, MEs and EMCs are not purely a management innovation of a company, but a social invention, because it involves giving employees the space to be autonomous and meet their higher self needs. This is in line with Gary Hamel’s idea of replacing the “Management 1.0” legacy of the industrial era with “Management 2.0.” For example, most managers still understand their job as “How do I get people to serve the goals of the organization?” rather than “How do I shape the work environment and create a sense of mission to engage people and motivate them to do their best at work?”. Therefore, the social invention of MEs is to build a business organization that keeps up with the times and responds to changes instantly, not just getting employees to come to work on time with discipline and perform their tasks step by step every day, but getting them to work with enthusiasm and imagination. According to Hamel’s understanding, as opposed to the previous companies that were more likely to force employees to perform with rigidly defined work procedures, now is the time to design a set of open and fair measurement methods and to exempt employees from too much restraint in order to motivate them to work enthusiastically and give full play to their creativity, while letting everyone know how they are performing, using this method to achieve some degree of discipline. This is achieved by giving people the freedom to self-manage the variables that affect performance. Managers can delegate authority over all variables that will ultimately have an impact on profitability. Once delegated, hold employees accountable for their decisions.8 As long as the compensation of employees is linked to the user value they create, and the 8 Mali Yang, Changshan You. Interview with Strategy Guru Gary Hamel: How Does Your Management Model Keep Pace with the Times? Vision. https://www.gvm.com.tw/ article/12031. 2007 (11).

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company’s systems are clear and transparent, the company will not need much management, and will reach the most ideal state of governance that Zhang Ruimin often talks about. 3.4

From Decentralization of Authority to Intrapreneurship

You may ask: What is the difference between this and decentralization of authority?

The difference is that decentralization of authority still takes place within a hierarchical framework and is only an improvement to the hierarchical organization, not a fundamental break with it. Today, large companies often suffer from their sheer size. Businesses have become so large that managers often make decisions without having knowledge about the problems they have to solve. And the traditional response to this situation is decentralization of authority. Unfortunately, decentralization of authority alone is not enough. In a hierarchical organization, promotion may be based on loyalty to the boss and office politics. Courage, creativity, and the ability to observe facts that are obvious but ignored do not necessarily lead to career success. In this case, what big companies need is not more semi-independent departments, but some kind of “entrepreneurs” who exist within the organization and act like market enterprises. In this sense, I prefer to call Haier’s current approach “internal entrepreneurship.” It is not only about the individual, but also about the productivity and responsiveness of the company. And, as mentioned above, this new approach to business activity is so important that it can be considered a social invention. In the past, the large multidivisional industrial company is a social invention in itself. Without this form of organization, it would be difficult to achieve the level of industrialization in the world today. However, no matter how successfully large companies have organized their complex production and distribution activities, the signs of their failure are everywhere: they are out of touch with reality; they respond more to their own needs than to changing times; nepotism and corporate politics are rampant, and inertia and blindness have become their incurable ills. Moreover, entrepreneurs do not need to please anyone other than themselves and the people they serve in their businesses. Starting a

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company relies more on individual effort and commitment. Rather than being a limitation, this personal orientation can lead to the creation of new businesses and the emergence of new ways of doing business. Making room for such entrepreneurs in the enterprise is the cure for the big company disease. The exploration value of Haier is that no large-scale company has ever adopted this model. In the West, there are also so-called intrapreneurial strategies, where a company organizes a team outside of its daily operations to operate like an entrepreneur, developing a new product or creating a new business. Haier’s MEs and EMCs, on the other hand, aims to develop an entrepreneurial spirit across the company, thus creating an “inverted triangle” organizational structure. Such business units have increasingly evolved into independent companies. Zhang Ruimin expects them to not only find market needs independently and react quickly, but also create market needs. Once employees have developed their creativity, a large company with $40 billion in sales can be broken down into a complex organization of more than 4,000 MEs. These groups achieve not only customer goals and market goals, but also their own goals, and the entrepreneurial spirit thus spreads throughout the organization. 3.5

The Competition of Management is the Most Important Competition of Innovation in the Future

Will such an exploration lead to problems? At the moment, it faces a series of challenges. For example, MEs are easiest to drive and execute in the marketing team, but can they function equally well inside the product planning and R&D teams? Customer needs, including revenues and costs, are the easiest to identify and measure, yet how are those non-financial metrics, such as innovation, to be measured? And, how do you manage the knowledgeable people in your organization? In this area, mechanical external controls exert little effect; what is needed is individual initiative, the instinct to make decisions on the spot, and self-restraint with clear boundaries. Can the space of the individual be well integrated with the strategy of the enterprise? How should the relationship between MEs and EMCs, as well as EMCs and EMCs be determined? Also, as a large international enterprise, can the current microenterprise model be replicated and run sustainably overseas?

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Ultimately, Haier encounters two problems (but they can be seen as one): how to give creative employees the independence they require while preventing them from disregarding the needs of the company, and how to make the company more capable of responding quickly and sensitively to megatrends as a whole. Addressing these issues will require a system that allows selected employees to have a status within the company similar to that of entrepreneurs in society, giving them independence while requiring them to meet the company’s overall technical, financial, and information goals. This will also test the mettle and breadth of mind of business leaders. It is of course up to these employees to earn their status as internal entrepreneurs, and once they have passed the test, leaders must allow them the power to act independently and not be restricted by the company’s fixed rules. Only then will the independent entrepreneurial spirit thrive within the company, which is the original purpose of the internal entrepreneurship system. As this system matures, internal entrepreneurs will spread throughout the enterprise, replacing the many inefficient and unsatisfactory functions in today’s companies. However, it is also important to keep in mind that the new unleashed energy will create new problems for centralized control, thus calling for new ways of organizing. American management scholar Gary Hamel once asserted that it usually takes 20 to 25 years for a new management mindset to spread. It took almost 25 years for the big American auto factories to really understand the superiority of Toyota-style management. Six Sigma was invented almost in the mid-1980s, yet it took 20 years to become a classic management tool worldwide. Innovation in management and organization is like innovation in technology; it takes a long time to gestate. And the biggest difficulty is the attachment of business managers to old paradigms and way of doing things. The key to competitive victory in 20 years is not industrial technology, not strategy, but how to lead, organize, and plan a business and how to allocate resources.9 Hamel says that whenever he goes to companies to speak about management innovation ideas, he always encounters company managers who say, “We know the challenges are daunting, and we like to think in 9 Mali Yang, Changshan You. Interview with Strategy Guru Gary Hamel: How Does Your Management Model Keep Pace with the Times? Vision. https://www.gvm.com.tw/ article/12031. 2007 (11).

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new directions, but we still can’t innovate.” Others say, “if companies that have already made a breakthrough can demonstrate to us their ways and guarantee that they can succeed, we can come and study how to do it step by step.” This shows that the new role model of management in the twenty-first century, the company that dares to adopt “Management 2.0,” which can also be said to be the pioneer of management innovation, is destined to be a minority. We sincerely hope that in 20 years, Haier’s management philosophy and model will become the majority throughout the world.

4

Tencent Must Prove Itself as a Technology Company

Do not focus on the next half of the Internet battlefield in China, but on the next big field of the Internet.

Tencent is embarking on the third organizational change in its history, and I’d like to talk about its refocusing. At 20 years old, it is time for Tencent to consider refocusing. On the evening of March 3, 2017, Pony Ma held a meeting with reporters, after which a media report was issued under the title of “Tencent’s Greatest Anxiety is over Technology.”10 In recent years, I have met with Pony Ma continuously during the Two Sessions in China. As I recall from the previous year, Ma emphasized that Tencent was strategically focused on connection and content, and of course, “half” on finance. This is the so-called Two and a Half strategy. After that, Pony Ma proposed in 2017 that Tencent should be a technology company in the future, which means that Tencent’s next big transformation is actually to solve the problem of what to do upon the “connection.” Specifically in terms of strategy and company positioning, I am afraid that Tencent will have to define what a technology company is or what technology is in Tencent’s eyes. After 2017, Tencent’s perspective of “technology” slowly surfaced. One way of putting it is to position itself as a “digital assistant” for all industries and help them achieve digital transformation and upgrading. 10 Pony Ma: Tencent’s Greatest Anxiety is over Technology. YICAI. https://www.yicai.com/news/5238938.html. Mar. 04, 2017.

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Another way is to play three roles: connector, toolbox, and ecological platform. In April 2018, Pony Ma summarized Tencent’s next step as “one, three, five, seven”: one goal, three roles, five areas, and seven tools. The “one goal” is to become a “digital assistant” and help various industries achieve digital transformation and upgrading. The “three roles” refers to Tencent’s focus on three things: being a connector, a toolbox, and an ecological platform. The “five areas” means that Tencent will add the Internet to five areas, namely people’s livelihood and public services, living consumption, production services, life and health care, and ecological and environmental protection, concentrating on their transformation and upgrading. The “seven tools” include digital tools like WeChat Official Account, WeChat Mini Program, mobile payments, social advertising, Enterprise WeChat, cloud computing/big data and artificial intelligence, and security capabilities. In fact, there are only two types of companies in the world: technologydriven companies and demand-driven companies. Since Tencent has proposed its transformation, it implies that before, both Tencent and the public perceived it as more of a commercial company or a demand-driven company. So, what is the difference between these two types of companies? The first is the difference in management philosophy. I call the management philosophy of technology-driven companies “build the key first, and then find the lock.” A technology-driven company drives the development of new products or services based on the company’s technical capabilities, not on proven needs. In fact, every breakthrough innovation made by it is based on a technology-driven orientation. Ma himself said: “Mastering technology is the only way to safeguard a company’s strategic high ground, which explains why when a wave comes, some can ride it out and some can’t. Technology is something we can’t get around.”11 This shows that he knows this well. Technology breakthroughs will likely not come from user demand. Therefore, technology-driven companies cannot be demand seekers. The core competency of a demand seeker lies in world-class consumer and user insight. The former requires instinct while the latter requires reason. 11 Pony Ma: Tencent’s Greatest Anxiety is over Technology. YICAI. https://www.yicai.com/news/5238938.html. Mar. 04, 2017.

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You might say that Apple is a classic demand-driven company. Absolutely not. Take a look at Apple’s key to success: a unique consumer experience, an extremely intuitive user interface, sleek product design, and iconic brand marketing. All but the last one are related to technologydriven companies, and to instinct. This is also evident from Steve Jobs’ disdain for market research. He famously said, “A lot of times, people don’t know what they want until you show it to them.”12 Apple developed not ordinary product improvements for its target demographic, but entirely new devices and services that consumers were not yet aware of. Isaacson says Jobs’ whims were instinctive, unforeseen, and sometimes magical. His “insights come out of the blue and require intuition more than mere mental processing power.”13 In contrast, China’s Internet giants are mostly demand-driven companies. In China, every high-tech giant can be an Internet company, a software company, and a device company at the same time because of the huge market demand. For them, the overall level of digitalization in other industries is generally low, and sectors such as information, entertainment, retail, and even finance are easily accessible. The Internet can even penetrate into the real economy effortlessly. Beyond industries, those high-tech companies have also infiltrated people’s lives extensively. The positioning of Tencent is “connection + content” and “Internet+.” The three major Chinese Internet companies (Baidu, Alibaba, and Tencent) are essentially built on the commercially underdeveloped wilderness of China, so the Chinese Internet giants grab territory from everywhere. What they want to do is to use the Internet to make up for the lack of facilities and business infrastructure. This is an environment where “there are locks everywhere, but the keys are missing.” In this sense, there is no difference between Tencent and Alibaba. If you have to distinguish, the difference between the two may simply be that Alibaba tends to go into the water to play in person, while Tencent is like a rich kid, standing at the water’s edge and letting poor kids play for him. There is nothing wrong with Tencent’s original positioning, which has contributed to its rapid growth. But the company needs to evolve itself.

12 Walter Isaacson. Steve Jobs. Simon & Shuster. 2011. 143. 13 Walter Isaacson. Steve Jobs. Simon & Shuster. 2011. 566.

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Tencent does want to transform and upgrade; however, in the past two years, it has not set the direction for technology, nor has it launched a clear strategic layout, and only the product spoke for the company, and it can be considered a product-oriented company. Tencent has yet to prove itself as a technology company. Successful innovators focus on what matters most, rather than spreading their efforts and resources across less important capabilities. The job of innovation leaders and corporate strategists is not just to choose which capabilities to focus on; they must also decide what is not important. Data algorithms, cloud services, virtual reality, retail technology, cashless society, cognitive computing (machine learning, deep learning, artificial intelligence), Internet of Things, awakening awareness of security and privacy, personalized experiences for content… In all of these areas, Tencent is far from being a game changer because it is still busy finding the key to the lock, and busy making money by meeting consumer demand. Because of this, I must amend the two types of companies: in addition to demand-driven and technology-driven companies, there is a third type of company—the mission-driven company. A great company never forgets to pursue its mission while pursuing profits. After solving the problem of profit, it is more important to solve the problem of mission. With this in mind, it is possible to ensure that every product developed and every need addressed is aimed at bringing the company closer to achieving its mission. Tencent has a remarkable corporate mission: to improve the quality of human life through Internet services. I hope Tencent can become a truly great company after it has already solved its survival problem (do not worry too much about stock price fluctuations). To build the next generation infrastructure rather than improve the existing one. Do not focus on the next half of the Internet battlefield in China, but on the next big field of the Internet.

5

Air of Innovation

In a global economy that requires the constant creation of new knowledge, the role of the region, as a geographical organizational units, has become more crucial than ever.

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They are increasingly becoming equally important economic and technological organizational forms as multinational corporations, even emerging as the core driving force behind innovation.

In the first Guangdong-Hong Kong-Macau Greater Bay Area Forum in 2017, Professor Zhou Qiren proposed that innovation should have “density” and “concentration.” Density is the concept of cluster, and concentration refers to the high frequency of interaction among different elements in a cluster. Industry clusters (also known as local business clusters) are not a new idea; industries have been clustered in specific regions of the national economy for a long time. Industry clusters, in particular, rely on networks of firms that emerge from a particular industrial system and constitute a source of innovation and competitive advantage that can differentiate firms in one region from those in another and from the regional economies in which they operate. Silicon Valley is arguably the best example of a high-tech cluster, where the industrial system established in the region has fostered the development of horizontal and decentralized inter-firm networks, as these interactions generate and consolidate relationships based on reciprocity and trust. This has allowed multiple spontaneous interactions to take place, resulting in a continuous mix of knowledge and information sharing. Such network relationships form the basis of a collective technological learning process. In such an innovation region, competition is not only reflected in the product, but also oriented to the efficiency of the supply chain system. The coordination of plans is not limited within the borders of individual companies, but can also be achieved through cooperation between companies. The network connections between companies are even somewhat like vertical integration of enterprises. Therefore, it is the regional competitiveness and not just the competitiveness of individual companies that play a role in an innovation region. In the wave of globalization, “local clusters” are beginning to take on a more profound significance, as globalization is creating more pronounced localization. In a global economy that requires the constant creation of new knowledge, the role of the region as a geographical organizational form has become more important than ever, increasingly becoming as important as multinational corporations in terms of economic and technological innovation, and even emerging as a central driver of innovation.

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At the Guangdong-Hong Kong-Macau Greater Bay Area Forum, more than one speaker mentioned that the success of the Greater Bay Area relies on four smooth flows—people, logistics, capital, and information. This, in fact, is the idea of realizing people’s full potential and making the most of available resources, aiming to significantly eliminate old spatial frictions and thus gain a competitive advantage under market freedom conditions. The key to competitive advantage is innovation, so we can see that the WIPO Global Innovation Index 2017 report emphasizes the concept of “innovation clusters,” noting that innovation centers at the city or regional level are often the drivers of a country’s overall innovation performance. It shows that regions are not only the focal point for organizing specific industry clusters, but also for organizing and managing innovation. This report breaks out of the mold of measuring national innovation and allows us to shift our attention from evaluating innovation in terms of national policies, laws and institutions, and national inputs to innovation, to focusing on the inputs and outputs of innovation that occur at the regional level. So, while we are pleased that China is among the global innovation leaders (it moved from 25th in 2016 to 22nd in 2017, the only middle-income country to enter the “top 25 club”), we are even happier to see that in the first-ever attempt to rank “innovation clusters” from hotspot regions in the Global Innovation Index 2017 report, the Shenzhen-Hong Kong region was ranked second among global “innovation clusters”, with “digital communications” as the main area of innovation.14 This clearly indicates that the vision of the Guangdong-Hong KongMacau Greater Bay Area has sufficient conditions for full implementation and is competitive in terms of institutions, talents, and innovation networks. However, does the region have a world-class innovation ecosystem? To answer this question, we also need to look at the relationships of local policies and institutions, social networks, local labor markets, and the level of professional services, etc., with innovation. At the same time, given that Hong Kong and Macau are the experimental sites of “one country, two systems,” we also need to consider the institutions and policies at the national level.

14 The Global Innovation Index 2017. https://www.wipo.int/edocs/pubdocs/en/ wipo_pub_gii_2017.pdf. June 15, 2017.

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By relatively high standards, I think the Greater Bay Area has not yet successfully fostered a strong “air of innovation” that pervades the region. What is the “air of innovation”? We all know that air is something that is everywhere, but at the same time, people often do not feel its presence. The “air of innovation” is about the relationship between companies, other local businesses, and the local environment. If we consider innovation as a collective process, we can conclude that regional culture is more important than corporate culture and that learning regions are more critical than learning organizations. While we may already be well aware of the importance of innovation in the economic system, we need to understand that innovation is a social process, i.e., it is based on the social organization that characterizes the local production complex. In the midst of major changes in the technological economy, the most creative companies cannot develop important new products or services behind closed doors, so innovation becomes a social process full of interactive learning. Innovation requires “context” and the accumulation of social capital in order to create strong intercompany collaboration and to encourage broad participation in networks within and outside the company. Without understanding this, it is impossible to gain insight into the true nature of the post-Ford learning economy. The “learning region” is a concept developed by economic geographers to emphasize the role of learning companies within a region to work closely together and learn together, something that is essential to enhance the innovation and competitiveness of companies and regions in the global economy. It implies a meso-level governance structure (both public and private) that promotes the social and economic well-being of local people with appropriate authority and budgets. When we talk about regional development, funding is often seen as a development bottleneck. However, funding is not a sufficient condition for the development of high technology and technological innovation. The foundation for future success lies in a mature enterprise system and a specialized division of labor economy, along with the regional innovation environment cultivated on that basis. Ernest Rutherford, the leader of Cavendish Laboratory, is rumored to have had an anecdote: just before reaching the great achievement of atomic splitting, the laboratory was in a desperate shortage of money, and Rutherford gathered his men and announced, “Buddies, we’ve run out of money. Now we must think.” And this is what learning is meant to be. In

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developed countries, where revenue growth comes primarily from innovation, innovation has become the most critical competitiveness. It comes from the application and commoditization of knowledge, while knowledge is distilled from a vast ocean of information. Intellectual capital is far scarcer and less mobile than financial capital, and is more concentrated in specific places: where knowledge centers such as universities and creative firms (large and small) intermingle, where the potential for the extraction of specific expertise and skills seems endless, and where information flows freely through formal and informal networks. All this poses great tests for the actors in a given region. How can companies build networks of trusting relationships and create a win– win situation of competition and coexistence? How can universities develop multidisciplinary and internationally minded talents and effectively translate knowledge into applications? How can the government carry out reforms across administrative boundaries, allowing for bold trial and error and experimentation? All these require a practical wisdom of learning by doing and doing by learning.