The Link Economy and Business Innovation

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Summary: American innovation is stumbling, reports BusinessWeek. Yet P&G reports that 10 years of innovation have doubled their sales to $80b. How? By operating in an analogue equivalent to the “link economy.”

BusinessWeek’s Chief Economist Mike Mandel recently penned “Can America Invent Its Way Back?” and highlighted that while the US spends on R&D, it doesn’t get its bang for its buck:

“Since 2000, the nation’s public and private sectors have poured almost $5 trillion into research and development and higher education, the key contributors to innovation. Nevertheless, employment in most technologically advanced industries has stagnated or even fallen. The number of domestic jobs in the computer and electronics sector continues to plunge while pharmaceutical and biotech companies lay off as many workers as they hire. And even the industry category that includes Google (GOOG)—Internet publishing and Web search portals—has added only 15,000 jobs since 2003.”

Mandel’s piece goes on to suggest that “innovation economics” are an important part of the road forward, stressing that idea management, culture, and “creation economics” are the antidote to traditional economic thinking that emphasize taxes, inflation, and cost-control.

He’s right, of course. Corporations (and the infrastructure that supports them like public labs, universities, and policy makers) are still in an industrial-age hangover, too blurry-eyed to notice that their organizational DNA—a military blueprint that favors information asymmetry and strict vertical hierarchies—is counterproductive to the post-grid era, a network model that encourages edge-competencies and group coordination.

Today, companies that act porously—enabling and encouraging the flow of IP and talent in and out of their sphere of influence—are winning
. Google is an obvious example, an organization that thrives largely by coordinating—rather than suppressing—the flow of information between people and markets.

So remarkable is their success that the “link economy” has become an increasingly recognizable phenomena, a pattern that spotlights value wherever it resides and manages abundance rather than controls scarcity.

Proctor and Gamble seems to understand this, despite their distance from Mountain View. Under the stewardship of A.G Lafley the Cincinnati manufacturer, responsible for all number of household items from Tide to Swiffer to Oil of Olay, has doubled its revenue to US$80b by focusing on innovation alone.

Lafley wrote about the firm’s approach in Strategy+Business, noting a few key points about the aggregation and syndication (my words) of IP and people:

“We focused on creating a practice of open innovation: taking advantage of the skills and interests of people throughout the company and looking for partnerships outside P&G.

We grow our business in these countries only by consistently developing new products, processes, and forms of community presence. And to do that, we need to involve people, inside the company and out, who are comfortable and familiar with the values and needs of consumers in these parts of the world.

We move people around geographically. We bring people into our Cincinnati headquarters from around the world, and we make a point of moving our headquarters people to our global businesses. Almost all of us have worked outside our home region. Almost all of us have worked in developing or emerging markets. And almost all of us have worked across the businesses. We track that progress very carefully.”

And on their substantial retooling of Febreeze for the Japanese market, he notes:

“This is a story we tell ourselves at P&G to drive home the need for integrative thinking. The project started with a consumer-centric concept. It involved people in a variety of functions and at least two regions. It opened our team members’ eyes to other possibilities. And it came to fruition because we were skilled at having the kinds of processes and conversations that would lead people to synthesize their ideas.”

Makes sense, doesn’t it? Work across boundaries and find value wherever it resides, use integrative thinking, be open to mistakes and possibilities, and, importantly, include people from “outside” the firm with cultural differences to highlight opportunity.

What’s ironic (or sad, or both) is that while Lafley’s been talking about this for ten years, P&G’s peers—big, traditional, manufacturing-oriented companies—still don’t seem to get it. “Most companies are unwilling to draw on outside expertise,” notes Mandel in his BusinessWeek piece.

Furthermore, most are scared:

“Globalizing research and production can also alter the direction of technological change—with potentially negative effects on U.S. prosperity. MIT’s Acemoglu, who holds dual American and Turkish citizenship, argues in his work that in the past U.S. companies directed their research to take advantage of the well-educated American workforce. Now, as more multinationals move operations overseas, they are developing technologies adapted for their less skilled foreign workforces. In other words, offshoring is affecting the direction of innovation in ways that are more favorable to countries such as China and India. In particular, says Acemoglu, “China is going to have a major effect on technology.”

Perhaps CEO’s would find Threadless a less intimidating case study than P&G. Skinny Corp, the Chicago-based owners of Threadless, have proven that peer-production—a native business model in the network economy—can provide high margins AND avoid commoditization.

Threadless sells t-shirts (a commodity business if ever there was one) but does so by aligning the t-shirt designers with customers—much the same way that Google connects publishers and advertisers. Their monthly design contest receives thousands of submissions from designers around the world (none who work for them) and tens of thousands of votes from their rabid fan base.

The result: a business that manages abundance (t-shirt ideas), provides value through transparency (the audience becomes both editor and consumer), and values the flow of IP and talent through them—rather than by them. (Doc Searls calls this kind of value “a shift from “making money with” to “making money because.”)

Can applying “link economy” strategies work for “traditional” companies? Here are Jeff Jarvis’ four principles. And below is a modified version, applied to companies in pursuit of innovation:

1. All companies must be transparent. Your talent base and IP must be exposed and connected. They’re not useable unless they’re linked.

2. The recipient of IP and talent is the party responsible for monetizing them. The more you enable the flow of IP and talent AWAY from you, the more it comes BACK—with greater value and skills to monetize. Just watch how Hollywood operates.

3. A porous organization is the key to efficiency. In other words: do what you do best and link to the rest.

4. There are opportunities to add value atop the IP and talent layer. This is where one can find business opportunities: by managing abundance rather than the old model of managing scarcity. The market needs help finding the good stuff; that curation is a business opportunity.

A final note. The roots of the link economy are empathy (rather than “ego,” which is the root of the industrial economy. More on that in another post.) Abundance causes anxiety. Those who can carefully manage, curate, design, and syndicate value reduce customer anxiety and create stronger links.

And in the “all this has happened before” footnote, consider the strategy of retailer Rowland Macy who, 140 years ago, counseled his employees to help shoppers find what they were looking for even if it meant sending them across the street to their competitors. Sending people away, just like Google, established Macy’s as the definitive department store.