The Connected Company

Transcript

1. Slide 1

   Presenter's Notes: Id like to talk today about something Ive been calling the connected company. 1

2. Slide 2

   Presenter's Notes: First I am going to set the stage by talking a little bit about what I mean by that. Then Im going to tell you why I think its important. Then I will talk about some practical things that you can do as next steps. 2

3. Slide 3

   Presenter's Notes: Lets start with what. 3

4. Slide 4

   Presenter's Notes: The average life expectancy of a human being in the 21st century is about 67 years, and its increasing all the time. Do you know what the average life expectancy for a company is? 4

5. From Creative Destruction by Richard Foster and...

   From Creative Destruction by Richard Foster and Sarah Kaplan
   

   Presenter's Notes: Surprisingly short, it turns out. In a recent talk, John Hagel pointed out that the average life expectancy of a company in the S&P 500 has dropped precipitously, from 75 years (in 1937) to 15 years in a more recent study. 5

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   Presenter's Notes: Why is the life expectancy of a company so low? And why is it dropping? 6

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   Presenter's Notes: As companies grow they invariably increase in complexity, and as things get more complex they become more difficult to control. I believe that many of these companies are collapsing under their own weight. 7

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   Presenter's Notes: The more employees you have, the more complex the system. The more complex the system, the harder it is to control. 8

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   Presenter's Notes: The statistics back up this assumption. A recent analysis in the CYBEA Journal looked at profit-per-employee at 475 of the S&P 500, and the results were astounding: As you triple the number of employees, their productivity drops by half (Chart here).This 3/2 law of employee productivity, along with the death rate for large companies, is pretty scary stuff. Surely we can do better?I believe we can. The secret, I think, lies in understanding the nature of large, complex systems, and letting go of some of our traditional notions of how companies function.The more employees your company has, the less productive each of these employees are. It is a generalization, of course, but a useful one and one that is confirmed by most people who have worked for growing organizations. As the company grows, so does the internal processes and the layers of bureaucracy, and the time spent on communications grows rapidly.It is, however, useful to look at the actual numbers. How much does productivity decrease as the organization grows? The answers are frankly frighting.To look at the effect in large organizations, we considered the constituents of the Standard & Poor's S&P 500 index of leading companies in leading industries of the U.S. economy.For each company we collected information on revenues, gross profit, EBITDA, and the number of employees. After removing some companies with missing or hard-to-use data (e.g. negative profits), we ended up with 475 large, publicly quoted American companies.As a metric for employee productivity we chose profits per employee. You can re-run the analysis with EBITDA or some other metric and the basic results do not change. See below for how to get the files.We then plotted in a log-log plot the profits per employee against the number of employees for the 475 companies in nine different industry sectors.The profit per employee versus the number of employees for 475 of the companies in the S&P 500 index.(Click on the image for a larger version.)Distribution of profit per employeeMin.8,2011st Qu.88,961Median167,089Mean298,5783rd Qu.311,342Max.4,689,266Naturally there is enormous variation in employee productivity in such a diverse set of companies and industry sectors. The largest employer is Wal-Mart with $75 billion profit and 1.8 million employees ($41,800/employee). The three top slots in terms of employee productivity are all in the financial sector, with Ambac Financial Group's 354 employees generating $1.66 billion profits ($4.7M per employee). At the bottom we find Darden Restaurants whose 157,300 employees each contribute $8,201 to the company's profits.However, the trend is clearly downwards. Fitting a power law give a slope of -0.68. This is scary. Three raised to the power of -0.68 is 0.47. This means that when you triple the number of employees, you halve their productivity. Or: When you add 10% employees the productivity of each drops by 6.3%. Of course, since 3 times half is greater than one, your total profits are typically growing.What causes it? Clearly, there is some element of self-selection: companies sometimes rationally choose to be in high-volume, low-margin markets. But I suspect that is also used as an excuse. There are more possibilities to encounter expensive relationship friction, but also more opportunities to resolve them.I think it is largely down to communications: the degree to which a vision is shared and the effective dissemination of new ideas ideas and working practices. Innovation velocity is dependent on collaboration; and collaboration among larger groups and creation networks require different skills and tools than what most executives are used to from smaller situations and is therefore often underestimated.Productivity in large enterprise is clearly a subject that deserves attention. If the S&P companies all achieved their average productivity, then they would between them generate an additional $2.9 trillion profit between them (with both winners and losers, of course). 9

10. Slide 10

    Presenter's Notes: THE COMPANY AS A MACHINEHistorically, we have thought of companies as machines, and we have designed them like we design machines. A machine typically has the following characteristics:1. Its designed to be controlled by a driver or operator.2. It needs to be maintained, and when it breaks down, you fix it.3. A machine pretty much works in the same way for the life of the machine. Eventually, things change, or the machine wears out, and you need to build or buy a new machine.A car is a perfect example of machine design. Its controlled by a driver. Mechanics perform routine maintenance and fix it when it breaks down. Eventually the car wears out, or your needs change, so you sell the car and buy a new one.And we tend to design companies the way we design machines: We need the company to perform a certain function, so we design and build it to perform that function. Over time, things change. The company grows beyond a certain point. New systems are needed. Customers want different products and services, so we need to redesign and rebuild the machine, or buy a new one, to serve the new functions.This kind of rebuilding goes by many names, including re-organization, reengineering, right-sizing, flattening and so on. The problem with this kind of thinking is that the nature of a machine is to remain static, while the nature of a company is to grow. This conflict causes all kinds of problems because you have to redesign and rebuild the company while you also need to operate it an idea dramatized in an EDS commercial from a few years ago: Building an airplane in flight. 10

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    Presenter's Notes: THE COMPANY AS AN ORGANISMIts time to think about what companies really are, and to design with that in mind. Companies are not so much machines as complex, dynamic, growing systems. As they get larger, acquiring smaller companies, entering into joint ventures and partnerships, and expanding overseas, they become systems of systems that rival nation-states in scale and reach.Companies 11

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    Presenter's Notes: You can think of a farm as a kind of organism because it is based on living things that are subject to a changing environment. Farmers cannot push a button and grow food. They have to plant seeds, cultivate them as they grow through changing cycles until they finally are able to reap value. 12

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    Presenter's Notes: Machines are made up of mechanical parts, like cogs and gears, that are placed in linear relationships with each other. If one link in the chain breaks, the entire machine usually breaks down. Relationships in organisms are more multidimensional, making it easier for them to adapt and respond to failures in the system. 13

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    Presenter's Notes: So what happens if we rethink the modern company, if we stop thinking of it as a machine and start thinking of it as a complex, growing system? What happens if we think of it less like a machine and more like an organism? 14

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    Presenter's Notes: We have improved our understanding of complexity dramatically in recent years, due to increases in computing power, the availability of more data and the ability to visualize it. Complexity is sometimes called the science of sciences because its rules can be applied anywhere we encounter complex phenomena. 15

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    Presenter's Notes: But companies are made out of people! Just because something works for ants doesnt mean it will work for us. 16

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    Presenter's Notes: So we want to focus on complex systems that are made up of people. What kinds of options does that leave us? 17

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    Presenter's Notes: Or even better, what if we compared the company with other large, complex human systems, like, for example, the city?Cities are large, complex, systems, but we dont really try to control them. In Stephen B. Johnson's book Emergence: The Connected Lives of Ants, Brains, Cities, and Softwarehe quotes complexity pioneer John Holland:Cities have no central planning commissions that solve the problem of purchasing and distributing supplies How do these cities avoid devastating swings between shortage and glut, year after year, decade after decade?No, we dont try to control cities, but we can manage them well. And if we start to look at companies as complex systems instead of machines, we can start to design and manage them for productivity instead of continuously hovering on the edge of collapse. 18

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    Presenter's Notes: Cities aren't just complex and difficult to control. They are also more productive than their corporate counterparts. In fact, the rules governing city productivity stand in stark contrast to the ominous 3/2 rule that applies to companies. As companies add people, productivity shrinks. But as cities add people, productivity actually grows.A study by the Federal Reserve Bank of Philadelphia found that as the working population in a given area doubles, productivity (measured in this case by the rate of invention) goes up by 20%. This finding is borne out by study after study. If youre interested in going deeper, take a look at this recent New York Times article: A Physicist Solves the City.Conclusion Patent intensitythe per capita invention rateis positively related to the density of employment in the highly urbanized portion of MAs. All else equal, the number of inventions per person is about 20 percent greater in an MA with a local economy that is twice as dense as another MA. Since local employment density doubles more than four times in the sample, the implied gains in patents per capita due to urban density are substantial. In short, we find empirical evidence consistent with a theoretical micro foundation of endogenous growth. In addition, we find evidence of increasing returns to scale in the invention process, but holding density constant, these returns are exhausted at a modest city sizecertainly below 1 million in population. Similarly, we find evidence of diminishing returns to density, but only at levels attained by a quarter of our sample.36 Our results also support theories that suggest that more competitive local market structures are more conducive to innovation. We find that industrial and technology mix are important in explaining the variation in patent intensity across cities, but we found no significant effects for our measures of industrial or technological specialization. We found that local R&D inputs, especially human capital, contribute to higher patent intensities and there is evidence of a very modest substitution effect between academic and private R&D intensity. Variations in the reliance of a citys industries on trade secret protection did not have a significant effect in our regressions. In the empirical work we have been careful in our definition of the unit of analysis and the inclusion of control variables that reflect the available resources (e.g. R&D, human capital, etc.) that are relevant to the local output of innovations. Thus we believe our coefficients on citysize and density reflect effects that are external to the firm, but not to the city itself. On the other hand, our regressions are not sufficient to identify a particular mechanism that explains why these externalities are important. We have suggested a few possibilities, such as better matches between firms and workers or easier transmission of tacit knowledge, but our technique cannot distinguish among them. In order to do so, we require more refined theories and yet more data. To investigate these questions more precisely, one might examine an additional direction of cross-sectional variation, that is, differences across industries. In particular, this would allow one to test the significance of urbanization economies (city size) and localization economies (the local size of the industry).37 A stronger approach is to focus on firms, the source of most of the innovations in our data, and to investigate the contribution of city characteristics to the productivity of the research efforts located in them. These are topics of our ongoing research. Working Paper NO. 06-14 URBAN DENSITY AND THE RATE OF INVENTIONGerald CarlinoSatyajit Chatterjee Robert Hunt Federal Reserve Bank of Philadelphia 19

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    Presenter's Notes: Okay, you say, but cities are fundamentally different than companies. Just because this works for cities doesnt mean that it will work for companies. Right? 20

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    Presenter's Notes: THE LONG-LIVED COMPANYActually theres some interesting data there too. Back in the early 1980s, right after the revolution in Iran, Shell Oil was concerned about the future of the oil industry. What might Shell look like after oil, they wondered? So they commissioned a study with some very interesting parameters:1. First, they looked only at large companies with relative dominance in their industries, companies similar to Shell in that regard.2. Second, they looked only at companies with very long lifespans 100 years or more.3. Third, they looked at companies who had made a major shift from one industry or product category to another.In other words, they looked at the immortals: the companies that didn't die.The study was never published, but the findings were detailed in a book:The Living Company by Shell executive Arie de Geus. Shell studied 40 large, long-lived companies, some of which were still surviving after 400+ years. 21

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    Presenter's Notes: Interestingly, these companies had a lot in common with large cities:Ecosystems: Long-lived companies were decentralized. They tolerated eccentric activities at the margins. They were very active in partnerships and joint ventures. The boundaries of the company were less clearly delineated, and local groups had more autonomy over their decisions, than you would expect in the typical global corporation.Strong identity: Although the organization was loosely controlled, long-lived companies were connected by a strong, shared culture. Everyone in the company understood the companys values. These companies tended to promote from within in order to keep that culture strong. Cities also share this common identity: think of the difference between a New Yorker and a Los Angelino, or a Parisian, for example. At the Dachis Group we like to call this common culture hivemind.Active listening: Long-lived companies had their eyes and ears focused on the world around them and were constantly seeking opportunities. Because of their decentralized nature and strong shared culture, it was easier for them to spot opportunities in the changing world and act, proactively and decisively, to capitalize on them. At Dachis we sometimes call this dynamic signal (watching and listening) and metafilter (information leading to decisive action). 22

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    Presenter's Notes: DESIGN BY DIVISIONHistorically we have designed companies like machines by division. We construct the org chart to divide the big chunks of work and separate them from each other: Finance, Sales, Operations. We design the work flows that process inputs into outputs: raw materials into products, prospects into customers, complaints into resolutions.As we design this kind of company the divided company we need to separate functions, which means people may not always have a sense of the larger thing they are working on. They get very good at one of the tasks, but lose touch with the larger picture. So we have to design rigid policies and procedures so people will function efficiently and so they wont interfere with each others work.The problem comes with scale. As the number of employees grows, the profit per employee shrinks. Its a game of diminishing returns. Efficiencies of scale are balanced out by the burdens of bureaucracy. Divisions become silos, disconnected from each other. Overhead costs increase with size. The resulting need for control, and the inability to achieve it at a reasonable cost, is what eventually kills a business. 23

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    Presenter's Notes: ESIGN BY CONNECTIONAlthough we tend to design companies like machines, we instinctively and intuitively understand that companies are not made of cogs, levers and gears. In the end, they are made out of people. For top management, it would be wonderful if we could put our business strategy into the machine, push a button and wait for the results. But it doesnt work that way. You have to put your strategy into people if you want to get results.And today, thanks to social technologies, we finally have the tools to manage companies like the complex organisms they are. Social Business Design is design for companies that are made out of people. Its design for complexity, for productivity, and for longevity. Its not design by division but design by connection.To design the connected company we must focus on the company as a complex ecosystem, a set of connections and potential connections, a decentralized organism that has eyes and ears everywhere that people touch the company, whether they are employees, partners, customers or suppliers. 24

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    Presenter's Notes: Social Business Design is a new discipline, but some basic rules are already emerging. These emerging rules have less in common with traditional business design, and more in common with urban design and city planning. Its not about design for control so much as design for emergence. You cant control a complex system, but you can manage its growth, and there are a lot of things you can do that will position it for success. Here are a few of those emerging practices that signal excellence in design by connection: 25

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    Presenter's Notes: Understand the culture: A company is like a city in many ways. First and foremost, a city is about the people who live and work there; its an expression of their collective culture. Before you can start your path to the connected company, you need to understand the culture (or cultures) that are already there, so you can look for ways to enhance and strengthen that shared identity. 26

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    Presenter's Notes: Start small. Urban designers might look at maps or aerial views as they make their plans, but the life of a city happens at street level. As you initiate social programs, think of them as if you are designing a city street. A successful street is filled with people. The last thing you want is a whole bunch of large, urban areas with no people in them. In a city, big, open, empty spaces feel unsafe and unloved. So start small. The smaller the space is initially, the faster it will fill up with people. A good way to start is with an organization-wide project or initiative that requires participation from a number of people across the company. This gives you a cross-section of ideas and perspectives to look at as you plan the next stage. 27

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    Presenter's Notes: Spaces need owners. Again, think of the city street: every business or building has an owner. The sidewalks have owners typically every business at street level polices their stretch of sidewalk. And even the street has owners the street sweeper, the cop on the beat. In the same way, make sure that every online space you create has someone positioned to take care of it, to keep it safe and clean. 28

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    Presenter's Notes: Every person needs a place. In the same way that public spaces need caretakers, every person needs a place to live; somewhere they can put their stuff. As you build your social business, make sure that every single person has a place where they can put, and see, their stuff: their projects, the links they want to get back to, the documents they have created, their role, qualifications, expertise and so on. 29

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    Presenter's Notes: Jumping-off points. A good city street offers opportunities that are unanticipated but serendipitous. The promising side-street. The sound of music coming through an open door. As you design for connection, think about how you might create those unexpected, but delightful, surprises. Every time someone visits an online space, theres a chance to offer them something new. 30

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    Presenter's Notes: Watch, listen, adjust and adapt. Design by connection is not a top-down activity so much as bottom-up. Complex systems just dont work that way. In a complex system, you need to pay attention to small things and make little adjustments along the way. Think about how city streets evolve: one small step at a time. One retailer moves to a larger space; another goes out of business. One old building is torn down and replaced; another is rehabbed and turned into lofts. Pay attention to the culture, and watch how people react to the tools you provide. Are they using something in a different way than you expected? Find out why and see if you can enhance that. And what are they ignoring? If theyre not using something you expected them to use, go talk to them and see if you can figure out the reason. 31

32. Slide 32

    Presenter's Notes: The typical company has a very short life, from 15 to 50 years. But cities and some companies live much longer lifespans: from hundreds to thousands of years. Wouldnt you like that for your company? I know I would.There is a lot of things I cant get into today because there just isnt time. But Im working on a book on the subject with my friend and co-author Thomas Vander Wal. Since theres been a lot of interest in this subject I have started an email discussion group, and if you give me your business card I will be happy to send you an invitation to the group. here.If you have thoughts I would love to hear them. I think we have time for questions? 32

33. Slide 33

    Presenter's Notes: In his address to the United Nations General Assembly on September 25, President Bush urged the nations of the world to work together "to free people from tyranny and violence, hunger and disease, illiteracy and ignorance, and poverty and despair."[1] That message echoes the enduring confidence that Americans have in freedom as a moral and liberating force for all peoples. It is the foundation of true democracy and human rights. Freedom is the engine that drives sustainable economic growth and provides increased access to prosperity for all people everywhere.Economic Freedom Empowers PeopleEconomic freedom is essentially about ensuring human rights. Strengthening and expanding it guarantees an individual's natural right to achieve his or her goals and then own the value of what they create. Amartya Sen, a Nobel laureate economist who has made considerable contributions to development economics, once noted that "Development consists of the removal of various types of unfreedoms that leave people with little choice and little opportunity for exercising their reasoned legacy."[2] People crave liberation from poverty, and they hunger for the dignity of free will. By reducing barriers to these fundamental human rights, forces of economic freedom create a framework in which people fulfill their dreams of success. In other words, the greater the economic freedom in a nation, the easier for its people to work, save, consume, and ultimately live their lives in dignity and peace.This relationship is well documented in the Index of Economic Freedom, published annually by The Heritage Foundation and The Wall Street Journal, which measures economic freedom around the globe. The Index identifies strong synergies among the 10 key ingredients of economic freedom, which include, among others, openness to the world, limited government intervention, and strong rule of law. The empirical findings of the Index confirm that greater economic freedom empowers people and improves quality of life by spreading opportunities within a country and around the world. As Chart 1 clearly demonstrates, there is a robust relationship between economic freedom and prosperity. People in countries with either "free" or "mostly free" economies enjoy a much higher standard of living than people in countries with "mostly unfree" or "repressed" economies.[3]Citizens in nations that are built on greater economic freedom enjoy greater access to ideas and resources, which are the forces that let "all of us exchange, interact and participate"[4] in an increasingly interconnected world. Access, another form of freedom that has practical promise, is an important transmitting mechanism that allows improvements in human development and fosters better democratic participation. A new cross-country study, recently commissioned and published by the FedEx Corporation, measures the level of access that a nation's people, organizations, and government enjoy in comparison to the world and to other countries. The study looks into trade, transport, telecommunication, news, media, and information services in 75 countries.[5]There is strong positive linkage between degrees of economic freedom and levels of access. As Chart 2 shows, greater economic freedom allows people to have more access to necessary means to success such as new ideas and resources. Reinforcing each other, greater economic freedom and better access to ideas and information combine to empower people, improve their quality of life, and expand opportunities for nations to benefit from global commerce.Higher economic freedom also has a strong positive correlation with the United Nation's Human Development Index, which measures life expectancy, literacy, education, and standard of living for countries worldwide.[6]By creating virtuous cycles and reinforcing mechanisms, the prosperity created by economic freedom results in reduced illiteracy (through greater access to education) and increased life expectancy (through access to higher quality health care and food supplies).[7]Economic Freedom Paves a Path to Political LibertyDebate over the relationship between economic freedom and political freedom and the question of causation has been somewhat controversial due to the complex interplay between the two freedoms. Yet it is well recognized that economic freedom leading to economic prosperity can enhance political liberty. As the late Milton Friedman, the father of economic freedom, once noted in his book Capitalism and Freedom:Economic freedom plays a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.As we have witnessed over the past decades, economic progress through advancing economic freedom has allowed more people to discuss and adopt different views...

34. Slide 34

    Presenter's Notes: In his address to the United Nations General Assembly on September 25, President Bush urged the nations of the world to work together "to free people from tyranny and violence, hunger and disease, illiteracy and ignorance, and poverty and despair."[1] That message echoes the enduring confidence that Americans have in freedom as a moral and liberating force for all peoples. It is the foundation of true democracy and human rights. Freedom is the engine that drives sustainable economic growth and provides increased access to prosperity for all people everywhere.Economic Freedom Empowers PeopleEconomic freedom is essentially about ensuring human rights. Strengthening and expanding it guarantees an individual's natural right to achieve his or her goals and then own the value of what they create. Amartya Sen, a Nobel laureate economist who has made considerable contributions to development economics, once noted that "Development consists of the removal of various types of unfreedoms that leave people with little choice and little opportunity for exercising their reasoned legacy."[2] People crave liberation from poverty, and they hunger for the dignity of free will. By reducing barriers to these fundamental human rights, forces of economic freedom create a framework in which people fulfill their dreams of success. In other words, the greater the economic freedom in a nation, the easier for its people to work, save, consume, and ultimately live their lives in dignity and peace.This relationship is well documented in the Index of Economic Freedom, published annually by The Heritage Foundation and The Wall Street Journal, which measures economic freedom around the globe. The Index identifies strong synergies among the 10 key ingredients of economic freedom, which include, among others, openness to the world, limited government intervention, and strong rule of law. The empirical findings of the Index confirm that greater economic freedom empowers people and improves quality of life by spreading opportunities within a country and around the world. As Chart 1 clearly demonstrates, there is a robust relationship between economic freedom and prosperity. People in countries with either "free" or "mostly free" economies enjoy a much higher standard of living than people in countries with "mostly unfree" or "repressed" economies.[3]Citizens in nations that are built on greater economic freedom enjoy greater access to ideas and resources, which are the forces that let "all of us exchange, interact and participate"[4] in an increasingly interconnected world. Access, another form of freedom that has practical promise, is an important transmitting mechanism that allows improvements in human development and fosters better democratic participation. A new cross-country study, recently commissioned and published by the FedEx Corporation, measures the level of access that a nation's people, organizations, and government enjoy in comparison to the world and to other countries. The study looks into trade, transport, telecommunication, news, media, and information services in 75 countries.[5]There is strong positive linkage between degrees of economic freedom and levels of access. As Chart 2 shows, greater economic freedom allows people to have more access to necessary means to success such as new ideas and resources. Reinforcing each other, greater economic freedom and better access to ideas and information combine to empower people, improve their quality of life, and expand opportunities for nations to benefit from global commerce.Higher economic freedom also has a strong positive correlation with the United Nation's Human Development Index, which measures life expectancy, literacy, education, and standard of living for countries worldwide.[6]By creating virtuous cycles and reinforcing mechanisms, the prosperity created by economic freedom results in reduced illiteracy (through greater access to education) and increased life expectancy (through access to higher quality health care and food supplies).[7]Economic Freedom Paves a Path to Political LibertyDebate over the relationship between economic freedom and political freedom and the question of causation has been somewhat controversial due to the complex interplay between the two freedoms. Yet it is well recognized that economic freedom leading to economic prosperity can enhance political liberty. As the late Milton Friedman, the father of economic freedom, once noted in his book Capitalism and Freedom:Economic freedom plays a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.As we have witnessed over the past decades, economic progress through advancing economic freedom has allowed more people to discuss and adopt different views...

35. City: Double the density of people and...

    City: Double the density of people and productivity increases by 20%
    

    Presenter's Notes: Conclusion Patent intensitythe per capita invention rateis positively related to the density of employment in the highly urbanized portion of MAs. All else equal, the number of inventions per person is about 20 percent greater in an MA with a local economy that is twice as dense as another MA. Since local employment density doubles more than four times in the sample, the implied gains in patents per capita due to urban density are substantial. In short, we find empirical evidence consistent with a theoretical micro foundation of endogenous growth. In addition, we find evidence of increasing returns to scale in the invention process, but holding density constant, these returns are exhausted at a modest city sizecertainly below 1 million in population. Similarly, we find evidence of diminishing returns to density, but only at levels attained by a quarter of our sample.36 Our results also support theories that suggest that more competitive local market structures are more conducive to innovation. We find that industrial and technology mix are important in explaining the variation in patent intensity across cities, but we found no significant effects for our measures of industrial or technological specialization. We found that local R&D inputs, especially human capital, contribute to higher patent intensities and there is evidence of a very modest substitution effect between academic and private R&D intensity. Variations in the reliance of a citys industries on trade secret protection did not have a significant effect in our regressions. In the empirical work we have been careful in our definition of the unit of analysis and the inclusion of control variables that reflect the available resources (e.g. R&D, human capital, etc.) that are relevant to the local output of innovations. Thus we believe our coefficients on citysize and density reflect effects that are external to the firm, but not to the city itself. On the other hand, our regressions are not sufficient to identify a particular mechanism that explains why these externalities are important. We have suggested a few possibilities, such as better matches between firms and workers or easier transmission of tacit knowledge, but our technique cannot distinguish among them. In order to do so, we require more refined theories and yet more data. To investigate these questions more precisely, one might examine an additional direction of cross-sectional variation, that is, differences across industries. In particular, this would allow one to test the significance of urbanization economies (city size) and localization economies (the local size of the industry).37 A stronger approach is to focus on firms, the source of most of the innovations in our data, and to investigate the contribution of city characteristics to the productivity of the research efforts located in them. These are topics of our ongoing research. Working Paper NO. 06-14 URBAN DENSITY AND THE RATE OF INVENTIONGerald CarlinoSatyajit Chatterjee Robert Hunt Federal Reserve Bank of Philadelphia 35

36. Company: Triple the number of employees and you...

    Company: Triple the number of employees and you cut your productivity in half
    

    Presenter's Notes: The more employees your company has, the less productive each of these employees are. It is a generalization, of course, but a useful one and one that is confirmed by most people who have worked for growing organizations. As the company grows, so does the internal processes and the layers of bureaucracy, and the time spent on communications grows rapidly.It is, however, useful to look at the actual numbers. How much does productivity decrease as the organization grows? The answers are frankly frighting.To look at the effect in large organizations, we considered the constituents of the Standard & Poor's S&P 500 index of leading companies in leading industries of the U.S. economy.For each company we collected information on revenues, gross profit, EBITDA, and the number of employees. After removing some companies with missing or hard-to-use data (e.g. negative profits), we ended up with 475 large, publicly quoted American companies.As a metric for employee productivity we chose profits per employee. You can re-run the analysis with EBITDA or some other metric and the basic results do not change. See below for how to get the files.We then plotted in a log-log plot the profits per employee against the number of employees for the 475 companies in nine different industry sectors.The profit per employee versus the number of employees for 475 of the companies in the S&P 500 index.(Click on the image for a larger version.)Distribution of profit per employeeMin.8,2011st Qu.88,961Median167,089Mean298,5783rd Qu.311,342Max.4,689,266Naturally there is enormous variation in employee productivity in such a diverse set of companies and industry sectors. The largest employer is Wal-Mart with $75 billion profit and 1.8 million employees ($41,800/employee). The three top slots in terms of employee productivity are all in the financial sector, with Ambac Financial Group's 354 employees generating $1.66 billion profits ($4.7M per employee). At the bottom we find Darden Restaurants whose 157,300 employees each contribute $8,201 to the company's profits.However, the trend is clearly downwards. Fitting a power law give a slope of -0.68. This is scary. Three raised to the power of -0.68 is 0.47. This means that when you triple the number of employees, you halve their productivity. Or: When you add 10% employees the productivity of each drops by 6.3%. Of course, since 3 times half is greater than one, your total profits are typically growing.What causes it? Clearly, there is some element of self-selection: companies sometimes rationally choose to be in high-volume, low-margin markets. But I suspect that is also used as an excuse. There are more possibilities to encounter expensive relationship friction, but also more opportunities to resolve them.I think it is largely down to communications: the degree to which a vision is shared and the effective dissemination of new ideas ideas and working practices. Innovation velocity is dependent on collaboration; and collaboration among larger groups and creation networks require different skills and tools than what most executives are used to from smaller situations and is therefore often underestimated.Productivity in large enterprise is clearly a subject that deserves attention. If the S&P companies all achieved their average productivity, then they would between them generate an additional $2.9 trillion profit between them (with both winners and losers, of course). 36

37. Slide 37

    Presenter's Notes: by Richard FloridaFri Jul 30th 2010 at 4:30pm UTCInternet Connectivity and Economic DevelopmentAcross the world, two in 10 households have access to the Internet at home, according to a just released Gallup survey. Internet access at home was far greater in more economically advanced countries: Nearly eight in 10 people (78 percent) in countries where gross domestic product (GDP) is more than $25,000 have Internet access at home. Home Internet access drops off steeply in less affluent, less developed nations, according to the Gallup survey, especially in countries with less than $10,000 in per capita GDP. The survey is based on telephone and face-to-face interviews with approximately 1,000 adults, aged 15 and older in 116 countries, and was conducted in 2009.The map above, by Zara Matheson of the Martin Prosperity Institute, shows the percentage of households with Internet connectivity, highlighting the top 10.The study notes the connection between home Internet connectivity and both urbanization and economic development. Populations in the most connected countries also tend to be highly urbanized, reducing the cost of extending Internet delivery modes whether phone and cable lines or wireless towers to a high proportion of residents. Two of the most connected populations in the world residents of Singapore and Hong Kong are entirely urban, the study reports, adding that: Internet access is clearly a function of economic development; as recent trends in China demonstrate, demand for electronics and online services grows as living standards rise along with disposable income levels.Home Internet connectivity is indeed a function of economic development, as my analysis with Charlotta Mellander finds, but it is also related to the transition from industrial to post-industrial societies.Source: World Development Indicators for 2006.Home Internet connectivity is closely associated with economic output measured as gross regional product per capita according to our analysis, with a correlation of .89. It is also closely correlated with total factor productivity (.87), the UN Human Development Index (.84), and the Global Competitiveness Index (.84) various measures of the level and extent of economic development.Source: World Development Indicators for 2006, calculations by Charlotta Mellander.But other factors also appear to be at play. It is not just the level of economic development that matters, but its nature and type, notably the transition from older, industrial-style economies and societies to newer, post-industrial ones, as I noted in a previous post. Post-industrial economies are distinguished by more highly educated populations or higher human capital levels; higher levels of knowledge-based, professional, and creative class jobs; higher levels of innovation and R&D; higher levels of entrepreneurship and business formation; and a shift toward more open-minded and tolerant values what Ronald Inglehart has dubbed post-materialist values. My recent research with Charlotta Mellander and Jason Rentfrow finds evidence that post-industrial socioeconomic structures and post-materialist values matter to the happiness of nations, especially of the most advanced nations, in addition to the effects of income and the level of economic development.Source: Based on average level of education by Barro and Lee, 2001.Home Internet connectivity is closely associated with the level of human capital (.73 ) and with the percentage of the workforce that are members of the creative class (.71).Source: International Labour Organization 2000-2006 (an average).Home Internet access is also closely associated with the level of innovation measured as patents (.86), research and development efforts (.89), and entrepreneurship (.69).Source: USPTO, 2000-2006.Home Internet connectivity is also closely correlated with happiness (.67) and slightly less so with more open and tolerant attitudes toward gays and lesbians (.48) and racial and ethnic minorities (.3).Source: Gallup World Poll, 2008.This is just a preliminary first-cut analysis. I point out that correlation does not imply causation and other intervening factors likely come into play. We hope to look at all of this in further analysis with more advanced statistical techniques. But, for now, we can say that while income and the level of economic development play an important role in home Internet connectivity, it is also related to the type and nature of economic development and the values it engenders. There is something in the nature of post-industrial economies that appears to work in addition to the effects of income. Perhaps it is that people with higher levels of education encourage people to be more connected. Or perhaps people in knowledge-based jobs feel they have to be more connected or their jobs require them to be connected at home as well as at work. Whatever it is, it is clear that not just the level of economic development, but the nature and type of development...

38. Productivity rises with internet connectivity

    Productivity rises with internet connectivity
    

    Presenter's Notes: by Richard FloridaFri Jul 30th 2010 at 4:30pm UTCInternet Connectivity and Economic DevelopmentAcross the world, two in 10 households have access to the Internet at home, according to a just released Gallup survey. Internet access at home was far greater in more economically advanced countries: Nearly eight in 10 people (78 percent) in countries where gross domestic product (GDP) is more than $25,000 have Internet access at home. Home Internet access drops off steeply in less affluent, less developed nations, according to the Gallup survey, especially in countries with less than $10,000 in per capita GDP. The survey is based on telephone and face-to-face interviews with approximately 1,000 adults, aged 15 and older in 116 countries, and was conducted in 2009.The map above, by Zara Matheson of the Martin Prosperity Institute, shows the percentage of households with Internet connectivity, highlighting the top 10.The study notes the connection between home Internet connectivity and both urbanization and economic development. Populations in the most connected countries also tend to be highly urbanized, reducing the cost of extending Internet delivery modes whether phone and cable lines or wireless towers to a high proportion of residents. Two of the most connected populations in the world residents of Singapore and Hong Kong are entirely urban, the study reports, adding that: Internet access is clearly a function of economic development; as recent trends in China demonstrate, demand for electronics and online services grows as living standards rise along with disposable income levels.Home Internet connectivity is indeed a function of economic development, as my analysis with Charlotta Mellander finds, but it is also related to the transition from industrial to post-industrial societies.Source: World Development Indicators for 2006.Home Internet connectivity is closely associated with economic output measured as gross regional product per capita according to our analysis, with a correlation of .89. It is also closely correlated with total factor productivity (.87), the UN Human Development Index (.84), and the Global Competitiveness Index (.84) various measures of the level and extent of economic development.Source: World Development Indicators for 2006, calculations by Charlotta Mellander.But other factors also appear to be at play. It is not just the level of economic development that matters, but its nature and type, notably the transition from older, industrial-style economies and societies to newer, post-industrial ones, as I noted in a previous post. Post-industrial economies are distinguished by more highly educated populations or higher human capital levels; higher levels of knowledge-based, professional, and creative class jobs; higher levels of innovation and R&D; higher levels of entrepreneurship and business formation; and a shift toward more open-minded and tolerant values what Ronald Inglehart has dubbed post-materialist values. My recent research with Charlotta Mellander and Jason Rentfrow finds evidence that post-industrial socioeconomic structures and post-materialist values matter to the happiness of nations, especially of the most advanced nations, in addition to the effects of income and the level of economic development.Source: Based on average level of education by Barro and Lee, 2001.Home Internet connectivity is closely associated with the level of human capital (.73 ) and with the percentage of the workforce that are members of the creative class (.71).Source: International Labour Organization 2000-2006 (an average).Home Internet access is also closely associated with the level of innovation measured as patents (.86), research and development efforts (.89), and entrepreneurship (.69).Source: USPTO, 2000-2006.Home Internet connectivity is also closely correlated with happiness (.67) and slightly less so with more open and tolerant attitudes toward gays and lesbians (.48) and racial and ethnic minorities (.3).Source: Gallup World Poll, 2008.This is just a preliminary first-cut analysis. I point out that correlation does not imply causation and other intervening factors likely come into play. We hope to look at all of this in further analysis with more advanced statistical techniques. But, for now, we can say that while income and the level of economic development play an important role in home Internet connectivity, it is also related to the type and nature of economic development and the values it engenders. There is something in the nature of post-industrial economies that appears to work in addition to the effects of income. Perhaps it is that people with higher levels of education encourage people to be more connected. Or perhaps people in knowledge-based jobs feel they have to be more connected or their jobs require them to be connected at home as well as at work. Whatever it is, it is clear that not just the level of economic development, but the nature and type of development...

39. Slide 39

    Presenter's Notes: By Jacob MorganImplementing Enterprise 2.0 at Intuit, Part Five: Operational Impact and Lessons Learned4 COMMENTSJuly 24th, 2010This is part five (and the final part) in a multi-part series on how Intuit is implementing Enterprise 2.0 within their organization.  Part one covered the business drivers of Enterprise 2.0, part two looked at some of the change management issues of Enterprise 2.0, part three explored cultural and organization shifts,  part 4 talked about technology adoption and encouraging use, and today were going to take a look at the operational impact and lessons learned within Intuit.The largest operational impact that Intuit realized was the speed in which it was able to go from idea concept to putting something in the customers hands.  Prior to any type of E2.0 initiatives it took Intuit around 13 months to come up with a product idea, build it, and put it into the hands of the users.  After their E2.0 efforts Intuit was able to do this in 5 months, a 60% decrease.  In the 6 months after Brainstorm was released the rate of ideation went up by around 1000% and the amount of participation was up over 500%.  Intuit has also developed several solutions that came as a result of internal ideas, many of these products are now generating revenue for Intuit and solving real world customer problems.Tools make it far easier for employees to collaborate and work together whether they are in an office or not.  If you are a remote worker it is easier to still to become a part of the company and stay together as opposed to feeling detached and isolated.  Instead of having remote employees Intuit has what it calls a flexible workplace and these new tools are helping make that happen.  Tools help reduce a lot of collaboration friction.Employees are now asking one another for help and are reaching out to people that they have never met.  Here are some quotes from team members at Intuit:You have one team out in Texas, and 2 teams in San Diego who didnt know each other.  Through Brainstorm, they realized that there were other teams out there and they joined forces.  Now just a few months later, there is a project fully resourced and in market.I didnt even know these individuals who appeared from various functions and across business units to lend support and help guide me along.  As a result, I was able to assemble an implementation strategy without a lot of background experience.  This helped foster the idea, move it to the point of pilot and now it is generating promising results.Intuit is using a host of tools and platforms in addition to Brainstorm.Yammer (very recently sanctioned by Intuit so its not at scale yet)Used as human powered search engine.  Employees ask questions and within around an hour or two they receive responses this is much easier and efficient than finding managers and asking them for information.  Yammer is great because it has a memory or in other words there is a record of interaction.  There are around 1,900 users and this is growing every day.  Many employees also use yammer to share information and content with each other.Office communicator for IM (or Gchat) or any IM (available to everyone)Used as a way to chat with people, integrated with calendar and corp directory.Brainstorm, for ideation (about15-20% of employees using it in a given month).Over 3800 ideas have been shared since it started.  Intuitlabs.com was also created which is a public facing website that highlights innovation (plays an important role in making sure teams know theres an easy way to get their innovative work into the hands of customers to see whether theyre solving an important problem well).  Brainstorm is not only highly energizing for entrepreneurial employees, but also helps provide critical early feedback to guide further work and investment.Mediawiki Currently there are dozens of active installations storing information and process information.  Also used to keep track of meeting notes and projects.WordPress blogsThere are currently a couple dozen wordpress blogs active in any one week (the same with Joinin blog, another internal blogging platform on Lotus Connections).  Some blogs are used for teams to update information on what they (or the company) are working on.  They are also used for general communication and personal information.Etherpad Mostly used for small group meetings when people are not in the same room.  Its deployed on an ad-hoc basis and is used only for meetings.  Employees  collaboratively take notes in etherpad and when the notes are closed the final version goes in media wiki.Internal videoThe CEO communicates with the company regularly to provide news and updates and leaders use it as a way to update the business units as to what is knew in that area, i.e. new payroll mandate from government or all hands meetings.Lotus ConnectionsA few dozen active blogs are active and around 40% of employees have done some editing of their profile.  Rich profiles help people find subject...

40. Slide 40

    Presenter's Notes: Are workers more productive in highly populated areas?A new paper by Matthew G. Resseger and Ed Glaeser, from Harvard University, shows a strong connection between per worker productivity and metropolitan area population, which is commonly interpreted as evidence for the existence of agglomeration economies. According to the paper, the correlation isparticularly strong in cities with higher levels of skill and virtually non-existent in less skilled metropolitan areas. This fact is particularly compatible with the view that urban density is important because proximity spreads knowledge, either making workers more skilled or entrepreneurs more productive. Bigger cities certainly attract more skilled workers, and there is some evidence suggesting that human capital accumulates more quickly in urban areas. 40

41. Slide 41

    Presenter's Notes: I found an article today (via Planetizen) that made me happy.  Ed Glaeser, the Harvard economist, writes that in addition to the traditional economic explanation for cities agglomeration, in which it is more efficient for manufacturing firms to share resources by being physically near each other there is an information component to agglomeration as well.  While the manufacturing version of agglomeration becomes less relevant as transportation costs have decreased in recent decades, Glaeser asserts that information- and knowledge-based productivity increases along with density:Glaeser, "Why Humanity Loves - and Needs - Cities" (NYTimes)One of the issues I have with the traditional agglomeration argument is that it does not sufficiently describe individuals desire to be near other people.  This isnt quite that argument, but its getting closer!Is this the new economic model for twenty-first century cities?  Or does it over-estimate the influence of the knowledge-based economy on urban form and our settlement patterns? 41

42. Slide 42

    Presenter's Notes: Importance of Enterprise 2.0 Connections to Innovation ROIby Hutch CarpenterIn a recent post on the Spigit blog, Study - Collaborative Networks Produce Better Ideas, I described the research of Professor Ronald Burt. He found that employees who are better connected across the organization generate higher quality ideas than those with limited connections. Wider access to the ideas, knowledge, experiences and judgment of colleagues makes employees stronger in innovation.I posted this write-up in the Continuous Innovation group on LinkedIn. One person made this observation:"Need to keep in mind that collaborative networks have little to do with technology. There are certain personality types that keep the organization connected. The proportions of those people in an organization is related to the specific corporate culture."There's a good alternative perspective. That really, the same people that connect via collaborative networks are those that would be doing it in an offline world as well. The rest of the employee population likely continues to work in a more insular world.I see it differently though. First, I agree that there are people with natural connector personalities. They would span the different parts of the organization no matter what. Anyone think David Armano wouldn't be one of those types?But not everyone need be an uber connector to see benefits from plugging into a more connected network. My personal experience on sites like Twitter and FriendFeed tells me that everyone benefits from these online social networks. We may not all be uber connectors, but we do increase our degree of connectedness.The graph below is my concept for how this effect manifests:Assume a population of employees: 25 in this hypothetical example. The blue line is the level of connectedness for employees working the way they have for decades. Your connections tend to be local and departmental, with some tenure you gain a larger informal network. In Professor Burt's terms, most workers are relatively insular in terms of who they access for information and ideas. But some broker connections across different corporate 'tribes'.The red line represents the level of corporate connectedness for employees including the ability to find others online. To me, this is a no-brainer. Of course people are going to connect with others they wouldn't have otherwise. The number, diversity and depth of connections increase.The gray zone between the red and blue lines represent that improvement. Some people won't get too much increase. They really are in-person types of connectors. But others thrive in the online environment. They have more specific interests, and didn't know who else in the organization held them. Through the social software, they find more people with interests similar to theirs. Or at least with experience relevant to their interests.Don't need to be an uber connector there. Just need to be able to make connections.Next..the ROI math.The Natural Logarithm MethodTake a look at the graph below. It shows the scatter plot of how ideas were rated for different employees (Y axis). The X axis represents the degree of connectedness for employees, based on actual social network analysis conducted by Professor Burt in his study:The scatter plots show that employees who have a high diversity of connections across the organization provided higher quality ideas. The converse holds true as well.Regression shows the equation that represents the observations:Value of Idea = 5.51 - 0.91 * ln(Level of Network Constraint)The equation shows that, on average, every increase in a person's level of connectedness with different parts of the organization produces higher quality ideas. Note the natural log curve. The effect increases as connectedness improves. What I like about that is that the benefits increase, even if the work of increasing employees' network diversity gets more difficult as you try to connect those last holdout groups.Extrapolate the effect out to the organization at large. Raising the overall level of workforce connectedness will have a salutary effect on the average quality of ideas generated. In an era of ever higher levels of market volatility, improving the organizational 'innovation IQ' is a critical aspect of surviving and thriving.One thought on the accelerating benefit - increased idea quality - as connectedness improves. In a large population, would this have any correlation to network effects?It's not perfect, but Professor Burt's analysis demonstrates a strong ROI basis for leveraging social software to increase the diversity of connections.Hutch Carpenter is the Director of Marketing at Spigit. Spigit integrates social collaboration tools into a SaaS enterprise idea management platform used by global Fortune 2000 firms to drive innovation. 42

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