No Time for Panic

Illustration by Brian Rea

In his recent column, The Economy of Fear, John Cassidy makes an excellent case that the U.S. is headed for an awful economic outcome. He compares the current economic situation with others caused by credit crunches over the past 150 years and does not like what he sees.

Unlike some past recessions, which were rooted in inflation problems, this one has been triggered by credit and real estate—both of which have a lot to do with how people perceive their financial well-being and, in response, how they adjust their spending. (View a tally of recent recessions and their causes.) For what is probably the first time since the 1930s, home prices are falling sharply. Nationwide, housing prices have slipped about 10 percent in the past year, and the decline is accelerating, according to the S&P Case-Shiller home-price index. As prices drop, more and more homeowners discover that they owe more than their property is worth, at which point they experience the temptation to hand the keys back to the bank or mortgage company. Jan Hatzius, an economist at Goldman Sachs, estimates that by the end of 2009 up to 15 million households could be in a position of negative equity. If Hatzius is right, the glut in houses for sale will only get larger, and prices will fall a lot further. Just how low they could go is anybody's guess, but a reading of data compiled by Yale economist Robert Shiller, which show the evolution of inflation-adjusted home values since 1890, suggests an overall drop of 30 or even 40 percent.

The situation is certainly serious, but in this analyst’s opinion not as grave as Cassidy portends. Like most U.S. analysts, Cassidy is understating the positive impact that globalization is having on world markets and how this can redound to the benefit of the U.S. And, he states that U.S. Federal Reserve Chairman Bernanke is pursuing Keynesian policies, when in fact he is taking a more nuanced approach.

First, the world economy is in far better shape than the U.S. economy, for a number of reasons:

• China and India, the Philippines, Malaysia and Eastern European countries are reaping the benefits of the opening of global markets in manufacturing and services
• As those economies build much-needed infrastructure and develop professional classes with strong consumer demands, they are driving up commodities prices and purchasing industrial and transportation equipment
• Oil-rich countries are reaping the windfall profits born of the tremendous uncertainty in global supply brought about by the Iraq war

Second, the deflation in U.S. housing prices, while very significant, is also very local. Financial centers like New York, Boston and San Francisco will be the hardest hit, while more balanced economies like Chicago and St. Louis are not feeling such great impacts. A 15% drop in housing prices nationally would be an astoundingly bad result--10% is much more likely.

Third, Bernanke is taking a targeted approach (see Getting it Right on the U.S. Economy), directly absorbing risk in financial markets while reducing interest rates and constraints on lending. Opening up the supply of money by reducing federal lending rates and shifting some risk from financial institutions will only be inflationary if matched by corresponding increases in demand. In the near term the more likely scenario is that all institutions will adjust through a rocky first and second quarter, financial and housing stocks will bottom out and increased export activity will start to be felt. Lenders are already finding creative ways of absorbing some of the cost of over-financed properties, as they attempt to avoid becoming America’s (bankrupt) landlords through mass foreclosure.

In the near term, government policy should be directed, as it has been, toward averting panic in the financial markets. (This is a far cry from a bailout—investors in lending institutions are in for a very rough time.) Moreover, the U.S. should be pulling out all stops to increase trade. Pennsylvania workers, for example will feel much better about their economic situation if they can start exporting Chef Boyardee product from Milton, PA to Canada, which currently matches our high tariffs on dairy-based products.

The U.S. might also try being a little friendlier to foreign tourists and students, not to mention U.S. business travelers. Much of the hassle of air travel is a direct result of the inability of Homeland Security to distinguish one common name from another, my own being a case in point. Perhaps it is time to rebalance our approach to risk and apply a political thumb to the economic side of the scale.

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What is the Extended Enterprise?

The "Extended Enterprise" is a loosely coupled, self-organizing network of firms that combine their economic output to provide product and service offerings to the market. Firms in the extended enterprise may operate independently or cooperatively.

Alternatively referred to as a "supply chain" or a "value chain", the extended enterprise describes the trading relationships among a community of participants involved with provisioning a set of goods and service offerings. The extended enterprise associated with "McDonald's," for example, includes not only McDonald's Corporation, but also franchisees and joint venture partners of McDonald's Corporation, the 3PL's that deliver food and materials to McDonald's restaurants, the advertising agencies that produce and distribute McDonald's advertising, the suppliers of McDonald's food ingredients, kitchen equipment, building services, utilities, and other goods and services, the designers of "Happy Meal toys, and others. In this example, McDonald's Corporation has organized local purchasing cooperatives, made up of representatives of local McDonald's franchisees and McDonald's stores, which determine how the local stores will source local advertising, food ingredients and other materials.

Extended Enterprise is a more descriptive term than supply chain, in that it permits the notion of different types and degrees and permanence of connectivity. Connections may be by contract, as in partnerships or alliances or trade agreements, or by open market exchange or participation in public tariffs.

The notion of the Extended Enterprise has taken on more importance as firms have become more specialized and inter-connected, trade has become more global, processes have become more standardized and information has become ubiquitous. Process standardization has permitted companies to purchase as services many of the business functions that previously had been incorporated directly into the organization of the firm. By outsourcing certain business functions that had been previously self-provided, such as transportation, warehousing, procurement, public relations, and information technology, firms have been able to concentrate their resources on those investments and activities that provide them the greatest rate of return. The remaining core competencies determine the firm's unique value proposition.

How the Extended Enterprise is organized and structured and its policies and mechanisms for the exchange of information, goods, services and money is described by the Enterprise Architecture.

See also:
Jeanne Ross et al. (2006) Enterprise Architecture As Strategy: Creating a Foundation for Business Execution, Cambridge, Harvard Business School Press. ISBN 1-591398-39-8

Chris Zook with James Allen (2001). Profit From the Core: Growth Strategy in an Era of Turbulence, Cambridge: Harvard Business School Press. ISBN 1-578512-30-1

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Getting it Right on the U.S. Economy

Benjamin Bernanke, Chairman, US Federal Reserve Bank


In all of the recent hand-wringing over the economy it is easy to forget that the world economic outlook is not uniformly bleak. Residents of China, India, Russia and Dubai are more likely to be complaining of growth pains and shortages than looming unemployment. In their great race to build housing and infrastructure, they have been bidding up world prices for oil and other commodities, just as North American farmers decide which crops to plant to feed and now fuel a hungry world.

If one shifts attention from depressed Ohio and Michigan factory towns toward Peoria and Moline, Illinois where Caterpillar (CAT) and John Deere (DE) manage global operations for manufacturing and marketing agricultural and industrial equipment, the mood improves. Both companies have seen growth in both their US and international manufacturing operations. While each has been hurt by the downturn in the US housing market and its impact on US forestry, building materials, construction equipment and trucking, they are being more than compensated by increasing sales of construction equipment overseas and agricultural equipment both domestically and internationally.

With commodity prices continuing to rise and interest rates having fallen substantially in recent months, Americans should be concerned about the prospects for inflation, particularly for energy and foodstuffs, but also for imported electronics and automobiles. Policy makers know, but are loathe to admit, that there are no simple U.S. economic policies that can assuage the angst of the common man. More than at any point in their history, Americans operate in a global economy and the tried and true economic policies learned by the Elders during more self-sufficient times are much less effective now.

The uncertainty in the U.S. financial markets reflects not only the immediate risks in the housing sector but also the greater risk that American government leaders will take the wrong course. Fiscal moves to stimulate consumption, such as Congressional plans for temporary tax rebates, will feed inflation without addressing the underlying imbalance in housing debt. Interest rate reductions may have little effect on housing lending if too many lending institutions become insolvent and unable to lend at all.

Thus, it was with some relief that the markets saw Ben Bernanke take a measured, if previously untried, move toward stability by directly having the government take on some of the risks in mortgage-backed securities. By addressing the problem tactically and head-on, the Fed reduces the risk of doing greater mischief longer term.

Well done.

Now, if we could get the U.S. presidential candidates to speak more honestly about the American role in the global economy, they might come up with more sensible approaches to entitlements, health care, immigration and military policy. Forgive me the audacity of hope.

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Modular Design for the Extended Enterprise

A "MILK" desk with embedded aquarium module

The Danes are so closely associated with clean, modular, functional furniture design that the term "Scandinavian Design" conjures immediate images of Danish furniture. The MILK.dk website demonstrates in 3D (requires Adobe Flash Player) that a beautiful and functional desk can be created modularly from a platform, by which we mean:

• A module is a self-contained unit that is designed to interact with other units
• The platform is a design solution composed of a core module and a collection of related modules that can be attached to form a complete design
  
• A finished design has more value to the user than the sum of the values of the modules
  

A platform manager creates a set of clearly articulated rules that governs the design of the modules, including:

• Market intent
• Product functionality and aesthetics
• Specifications for interoperability of modules
• Time frames, milestones and deadlines
  
• Infrastructure for collaboration
• Governance of market collaborators
  

When the platform manager executes contracts to interact with suppliers of services related to the provisioning or fabrication of modules or the assembly, distribution, or sale of completed designs, the manager creates an extended enterprise, sometimes called a value chain.

Participants in this extended enterprise of collaborating suppliers of products and services may be:

• Owned and operated by the platform designer (internal) or owned by a third party (external)
• Selling solely to the platform designer (exclusive) or selling to many others (non-exclusive)
• Co-located with the platform design (on-site) or geographically distinct
• Strategically aligned with the business of the platform designer or independently operated
  

Whereas the design of the product platform is critical to the success of its product family, the design of the extended enterprise determines the success of the business itself.

See also our posts:

• Building the Scaleable Enterprise
• Management Owns the Enterprise Architecture
• Design is Destiny

See our newsletter on Restaurant Lifecycle Management here.

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The Surprise of the New

Shannon Farrell Williams, violist


Innovations frequently, perhaps typically arrive before they have found a receptive market. Just as consumers must learn to adapt their tastes and habits to the concept, so must suppliers adjust their offerings to serve new requirements efficiently. Operating within this constantly adjusting milieu, investors may decide to pull a product today that might very well succeed with only minor adjustment later.

This is as true for consumer products as it is for music. Composer John Adams introduced three versions of Dr. Atomic; the 4-hour opera debuted in October, 2005; the first symphonic version was introduced in London in August, 2007 and an even more condensed, more melodic symphonic version premiered in St. Louis and New York in March, 2008 to much greater acclaim.

For a less famous composer, the distance between obscure appreciation and popular success can be much longer. In the twenty years since George Benjamin first introduced Sudden Time audiences learned to appreciate a composer's play with cadence and discordance in the development of a complex musical theme and musicians developed new techniques to give full measure to the composer's intent.

In his excellent blog for the St. Louis Symphony Orchestra (SLSO), Eddie Silva discusses how difficult it is to introduce innovative, unfamiliar music:

How do you program concerts when you have audiences that want entirely different things from a night with the SLSO?

You [the audience] are paying money to be entertained, or maybe more than entertained. Do you want the familiar or are you interested in what is unfamiliar? What if you pay good money and you just don’t like it? What if you are like the poet C.D. Wright, who once wrote that she went to art “to be changed, healed, charged.”

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There are still people who think Jackson Pollack drip paintings are child’s play, a hoax, an affront to their sensibilities. An easy assumption is that the artist is putting you on...

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yet you had only to have witnessed the absolute joy on George Benjamin’s face after the SLSO gave his "Sudden Time" such a mesmerizing performance at Carnegie Hall*, where the subtle tablas felt like raindrops and the final viola solo (played exquisitely by Shannon Farrell) felt like the melodies of gods. Benjamin looked like the kid who gets the tour with Willy Wonka in the chocolate factory -- and you knew he wasn’t fooling with you or trying to get into your face. As a composer he was in search of a profound beauty unlike anything else. And he had just heard it.

Too many products and too many scores are scrapped, rather than shelved, when they fail to meet certain market tests. A wealth of intellectual property, literally thousands of learnings from hundreds of thousands of sources can be destroyed in that process.

Consumer products companies have only recently begun to catalog the product-related information accumulated during a product's lifecycle. By adopting effective Product Lifecycle Management (PLM) processes to capture and preserve this hard-earned corporate knowledge as it is accumulated they can save a fortune in product redevelopment when markets align: when "Sudden Time" becomes Now.

*The concert was performed on March 30, 2007. See reviews of the entire concert by Bernard Holland in the New York Times and Eddie Silva on SLSO.org.

See also an interview with David Robertson, conductor and music director, on his approach to classical music.

For another article on innovation featuring the St. Louis Symphony, see Innovation Thrust Upon Us.

Just for FUN, visit this site to create your own "Jackson Pollock"

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Mastering Innovation Management

Throughout 2002 US manufacturers were cutting costs and curtailing investment in systems, innovation and, perhaps especially, consulting. When A.T. Kearney asked me to host a breakfast meeting of local Chicago executives, I asked Mir Aamir to help me put together a presentation on innovation that would highlight some of the advancements made in the auto and aerospace industries by our sister company, PLM (now Siemens PLM).

Prof. Willard I. Zangwill of the Graduate School of Business of the University of Chicago agreed to help us formulate ideas and the marketing staff did an outstanding job of organizing the event. Still, when the day arrived I just wasn't all that comfortable that we would have enough "new news" to satisfy the 30 or so people who were assembling, because it was clear that a number of astute innovators in their own rite had accepted our invitation.

We were about to deliver a lecture on how product lifecycle management technologies were enabling collaboration and knowledge-management among work groups that are distributed across far-flung enterprises. Instead, as coffee was being poured, we decided to turn the presentation into a collaborative work group. The discussion that followed was so rich and animated that it generated a much better white paper, "Mastering Innovation Management: Collaborating for Speed and Profit". (click to download the paper)

The panel agreed that the biggest challenge related to innovation is getting people to agree. Their recommendations:

1. Focus on Priorities. Leaders in innovation begin with an intimate understanding of what their brands communicate, what needs they fill and what competitive niches they address. Paradoxically, they are able to sustain creativity by managing development through formal evaluation processes.
   
2. Begin Collaboration Early. Collaboration solutions, such as wikis, enable organizations to share ideas globally, specifically, incrementally and immediately. Data capture becomes more critical, and more challenging, as businesses break products and processes down into modules to increase efficiency and boost flexibility.
   
3. Link Key Parties. Top companies bring global research and development, engineering, manufacturing, sales and marketing and key suppliers into the design process. When companies focus on upstream prevention, rather than downstream enhancements they ensure they can actually deliver the innovative products they develop.

See "Making Agility an Ability", by Allan Alter, in the Fall edition of Innovations 2007

See also "Wikis While You Work", by Dave Greenfield in eWeek, November 26, 2007

See also: "Innovation, Communication and Leadership: New Developments in Strategic Communication", by Ansgar Zerfass and Simone Huck, International Journal in Strategic Communication 1(2), pp. 107-122

See also: The Frank Lloyd Wright legacy: an expensive taste in buildings on the Gabion website for an interesting account of the innovation challenge posed by an architect's unwillingness to collaborate. Fallingwater House, arguably Wright's most famous home design, was not structurally sound.

Contrast Wright's stubborn deification of personal style with the approach of Eero Saarinen, architect of the St. Louis Gateway Arch, pictured above. Saarinen was loved by his patrons and ridiculed by contemporary architectural critics, notably Vincent Scully of Yale, for refusing to elevate a signature style over functional design requirements.
See Saarinen Rising: a much-maligned modernist finally gets his due, by Clay Risen, The Boston Globe, November 7, 2004.

See also: Building Respect at Yale, New York Times, December 16, 2007

See also our post, Best Practices in Architecture, for a fuller treatment of the approach of Eero Saarinen.

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