Taken from Chapter 10 - American Productivity and Global Competitiveness in The Power of Done
American prosperity is a testament to more than two centuries of ingenuity and productivity. In recent years, our outsized slice of the world’s economic pie has been fully baked because of our leadership position in many high-value markets like finance, pharmaceuticals and technology. Each of these markets includes a heavy concentration of the highest margin components in the value chain. And not insignificantly, the core components of these industries are innovation and knowledge workers.
Defining the value chain is totally subjective. If you’re IBM talking about your global business model, you might label the components: R&D, Procurement, Manufacturing, Sales, Distribution, and Service & Support. If you’re a bio-technology firm, you might shorten the list to: Discover, Develop, Manufacture and Market.
But we think the simple model as illustrated by Stan Shih, the founder of Acer, is the best depiction of the value chain and its relative margins. Shih’s design is called the "Smiling Curve.” It looks at the personal computer industry and demonstrates that the ends of the value chain, where R&D and marketing reside, command higher value than the center part, which is composed of raw materials / natural resources, labor and manufacturing.
In terms of nations, the “Smiling Curve” model is currently best suited to the United States because we are – at least for the moment – the leader of the world’s knowledge economy. That said, it’s important for all of us to recognize the fact that other countries want to achieve greatness in this high-margin economic environment, too. And they’re beginning to make some headway.
The huge land masses and massive labor pools of motivated workers in China, India and Indonesia, for example, have been steadily vacuuming out of the center of our value chain.
This much we know. But now the high-margin ends of the value chain – R&D and marketing – are also under serious attack.
The Smiling Curve Source: Wikipedia
There are five key reasons why the high-margin ends of our value chain are being chewed up by other up-and-coming countries:
- Their improving educational systems
- Their growing know-how
- Their expanding technology base
- Their willingness to work hard
- Their increasingly more responsive rewards system
There’s another painful twist to this that has to be put on the table, too. Many citizens of these rising nations come to the United States for advanced education and skills training and then return home to create high-margin value in their native countries. We lose on both ends in America, and it’s beginning to show.
This turn of events is really unfortunate. For years, the United States and other first-world countries have had an enviable edge in the quality of education, the motivation of a free market system and the availability of capital. These factors have kept us highly productive and at the forefront of innovation, particularly in technology and science. And that’s why we’ve developed and marketed generations of high-margin products and services.
But we are clearly losing ground here. And our advantageous position is being eroded as the education systems in other countries catch up and pass ours. These nations are now turning out more and more scientists and engineers each year. And even though their graduates may be process-oriented rather than creative problem-solvers like we find in the United States, they still have the ability to generate meaningful economic growth.
Most people are focused on the marketing and R&D ends of the Smiling Curve today. And with good reason. Yes, the outsourcing of manufacturing jobs is what pulls at our heart strings, but it’s the outsourcing of knowledge workers that pulls hardest at our purse strings. If Intel builds a manufacturing facility in Indonesia rather than in Oregon, for example, there’s definitely a negative macro impact – a reverse multiplier that sucks financial life out of our country; but the loss of high-powered, high-margin knowledge work creates a pervasive negative psychology that steadily gnaws at our economy and is getting harder and harder to offset.
But the reality in business today is that the most competitive companies will leverage products and services from the lowest cost, highest quality sources – wherever they are in the world. How else can they compete in a relentless global economy where price and time-to-market advantages are the essence of survival?
So the big challenge for us in the United States today – assuming we want to retain economic leadership and an affluence that enables the kinds of community services and lifestyle we have come to expect – is to find ways to make sure the Smiling Curve is grinning from ear to ear, and not tugged down into a frown. A grin means we are holding onto (and expanding) high-margin knowledge jobs in R&D and marketing; a frown means those economically powerful jobs are leaving our shores.
How do we do that?
Well, clearly – as we mentioned above – through a strong and fortified educational system. And certainly through an economic reward system that favors high-margin knowledge workers as much as rock stars and NBA centers.
But also, and just as importantly, through next-generation technology that enables productive, constructive and real-time collaboration among teams of knowledge workers wherever they sit in a company – or in the world.
This is a huge competitive advantage for 21st century business.
And if we want to fully leverage this advantage, and truly embrace a future that’s driven by technology enabled work collaboration, we’ll need to develop a host of sophisticated new IT solutions.
These solutions will have to be flexible in order to accommodate teams of global knowledge workers that expand, contract, divide and reconnect in ever changing ways; they’ll have to be easy to manage; and they must be simple so everybody on the teams can participate and benefit from them around the clock regardless of their time zone.
Think of these solutions as part of a global switchboard that connects real and virtual teams on an as-needed basis in order to accomplish specific work. And the important components – the tasks, milestones and deadlines, as well as the team members who own specific responsibilities – will always be clearly visible to the far-flung group.
We always like to celebrate the great teams in global companies that work productively together to achieve business objectives. But it’s also important to recognize the managers and executives who understand how to organize and optimize constructive collaboration.
These are the heroes of the knowledge-based global Interaction Revolution.
And looking ahead, they will also be the drivers – the rock stars – of the new electronic work exchanges that will populate the globe and make the work world move fast and productively in the coming decades.
Electronic exchanges have already created perfect real-time visibility into the trading of stocks and commodities. Investors put things up for sale at prices they are willing to accept, and buyers purchase when prices meet their criteria. The transactions are consummated and the exchanges churn on.
In the work world, less mature forms of work exchanges have existed and continue to pop up. At Microsoft, for example, technically savvy folks can sign up on a digital bulletin board to deliver specific “how to” articles about the company’s treasure trove of product components. One couple sailed a 30-foot sailboat across the Pacific and actually paid for their journey by downloading and uploading documenting jobs from the bulletin board via satellite.
Amazon’s Mechanical Turk offers an even broader application of a work exchange. A wide range of employment opportunities are posted on “The Turk” and any online surfer can bid for – and secure – the jobs. “The Turk” has been successful so far because the work is tightly defined and the descriptions of each task are light on subjectivity. For example: “Tag these 1,000 images and then characterize the color, setting and era.”
Now, let’s consider what a global executive or manager has to accomplish with a typical team-oriented project. The project will almost certainly require a broad array of deliverables – from the graphics department, the legal team, the product management staff and the documentation group. On the surface, it wouldn’t be unreasonable to expect that the internal departmental staff would be best suited to deliver on the each component of this project. But here’s an interesting question worth asking: Would their performance change if they had to compete on cost and quality with the world’s online workforce?
We believe the answer is definitely yes. Our view is that over the course of an individual project or corporate fiscal year, global work exchanges will absolutely stimulate more productive virtual team participation. And the top- and bottom line results will show.
And when they eventually become a full-on global reality – and this will happen sooner than we think – dynamic work exchanges will bring high levels of transparency and efficiency that will also dramatically increase the world’s productivity growth.
As we mentioned when we started this journey together, boosting global productivity growth is essential if we want to live fruitfully during the 21st century. The key, however, is to use technology in the right way. That means our digital solutions must always make sense to well-intentioned companies and the legions of industrious people within them. That’s a big challenge, without doubt; but it’s well worth undertaking.