The Global Human Capital Journal

Social Channel Three: Using the Social Channel to Defend Native Markets and Penetrate Foreign Markets

The global Social Channel will reintroduce “home court advantage” to national brands because those that use social business to compete globally by collaborating with users will have the cultural advantage; “foreign” firms may have better product features for the money, but they will not match home brands’ cultural fluency. Personalized service and attention are culturally specific, and deep cultural fluency directly corelates to intimacy. However, brands can only develop the home court advantage by practicing social business at an advanced level. Most have a long way to go and, meanwhile, they will get hammered when they persist in competing on product features in the Productized Channel of Value.

The blade cuts both ways: the home court advantage will make exporting to emerging markets much more difficult in the years ahead. The Social Channel will raise the bar because users in all markets will increasingly expect brands to relate to them and to solicit their input and advice. Brands will have to invest significantly in developing in-market social business teams that can build, nurture and leverage online relationships at a high level.

This is Part Three of the Social Channel Trilogy. It will help CEOs and CMOs realize how the Social Channel will transform global markets. Brand stewards will learn how to use social business to defend against foreign firms and how to penetrate foreign markets. The trilogy reveals how companies can combat commoditization and develop new markets by tapping socially-powered innovation.

Not Your Father’s Global Economy

The “global economy” of yore featured “advanced” industrialized economies that tweaked their product lines to sell in less developed markets, a reliable practice that boosted demand for these producers. Their products were more advanced than local offerings, which provided competitive advantage. “Emerging” countries were consumers of “advanced” countries. Today, however, “emerging” is as likely to denote a country whose plant production is on par or better than that of “advanced” countries, and they are exporting worldwide (Huawei is a quintessential example of a Chinese global leader). Online users everywhere openly discuss imported products’ advantages and shortcomings. Brands have historically been shoddy about doing research and design for local country user experience, and empowered users will be far less forgiving when they read frank accounts of disappointment online.

Social Channel One showed how the global economy has permanently changed as a function of Internet adoption, financial liberalization, social business and pervasive smart industrialization. All firms are competing globally whether they perceive it or not. Here is a summary of how global markets are evolving:

• Internet adoption/ecommerce—anyone with a web browser can hit your website, and online translation widgets are getting quite good for basic things; clients are regularly baffled by Asian buyers (“How did they find us; we’ve done no marketing?”). One third of Earth’s 7 billion population is online, and adoption is accelerating.
• Financial liberalization—it is increasingly seamless for people to pay for online purchases across borders. This enables global ecommerce, and adoption is accelerating.
• Social business—by finding each other online, researching and collaborating, groups of people with similar interests drastically cut the barriers to buying abroad. Let’s say I want a Chinese delivery bicycle, but I don’t know the market, all the vendors, etc. I can find a community of people, and we can use our collective networks to ferret out all the information we need; we can even try for a group buy.
• Smart industrialization/commoditization—Read Social Channel One to fully appreciate the imminent end of product feature differentiation. Due to online information, digital social collaboration, software-powered plants and smart distribution, commoditization is the rule for an increasing share of products. This state reflects the twilight of the Industrial Economy, which is fading in favor of the Knowledge Economy in which buying decisions are driven by online comments, ratings, discussions and friends/connections. Brands will be forced to engage online to influence buying decisions; product features will play a decreasing role. Globally, production is growing faster than consumption in many product categories, and emerging markets will add to the capacity. Meanwhile, “snap together” supply chains and multisourcing methodologies make firms more agile than ever.

Due to these converging market forces, commoditization will continue to accelerate globally, and most firms will find it exceedingly difficult to compete on features of mass-produced products and mass-managed services.

Firms that want to thrive will jump into the Social Channel early to work up the learning curve before their competitors realize what has hit them.

Using the Global Social Channel to Compete Within and Across Borders

Background

“Social” business is filled with nuance and complexity—it involves interacting to build relationships and trust—and teams usually require extended mentoring to mitigate risk and boost early results. Firms that adopt early have several advantages:

• They have more time to build a solid bench of internal knowledge and expertise. For example, how to engage nuclear power engineers, mothers who sew, corporate treasury officers…
• Users’ expectations are relatively low now; next year, when they’ve experienced brands who try to fake “relationship” but expose their promotional goals, they will put up the bar. Similarly, when they experience people and firms that add value, their standards will go up.
• Social business will transform organizations, so getting the transformation process going earlier will offer cumulative benefits. As detailed in Social Channel One, most firms begin on the front end, interacting with users (erstwhile “customers” or “clients”) in relevant venues. That has little impact on the organization, but the second stage is back end, engaging users to give input into product and service delivery options and, later, product/service design itself. Key highlights:
  • Firms that reach back end social business earlier will be beating competitors on the front end and the back end, so benefits accumulate.
  • Firms that engage users collaboratively will confer “co-ownership” of the firm and its “products/services”; when people give important input that improves their outcomes (of using the product or service), they feel a strong sense of excitement and ownership.
  • In this context, “marketing” cuts back on promoting and builds expertise in providing superior service across every interface the firm has with users.

One of the most difficult Social Channel concepts for organizations to grasp is changing their orientation—away from product features and toward user experience, as detailed in Social Channel One. Product and product feature innovation happens relatively slowly, so the market opportunity is interacting with users (of your product/service) in digital social venues to help them create better and more meaningful outcomes when they use your product/service. When you think about it, aren’t user outcomes the point, anyway? Social Channel Two details how to leverage the Social Channel to compete, step by step.

Digital social venues have several features that enable this new era in creator/user collaboration that few executives appreciate because they haven’t spent enough time online to understand the potential.

• Knowledge is social. By sharing situations, beliefs, thoughts and idea, and getting feedback from a large group, everyone who is talking or listening is getting educated, very quickly. Digital social venues make this hyper-efficient; hundreds of people can participate, and people can drop in any time, guided to the conversation by specific keyword combinations (i.e. google). The people who know the most or make the most compelling statements get the most attention.
• The more specialized the situation, the easier it is to find the conversations (attention B2B). A couple dozen passionate people discussing specific situations (“use cases”) can create very rich and valuable content, which can be reused forever because it exists online.
• The passionate and knowledgeable minority drives the conversation, assisted by a 10-fold larger group and observed by a 100-fold even larger group. Everyone in the social venue is influenced by what happens. This is the network effect: by engaging with the few, you are impacting the many, even though most are observing silently.
• Users, when they are stating problems and sharing experiences and solutions, educate each other very quickly. They are the authority of the outcomes they desire. They know more than any company. Most firms must learn how to collaborate with empowered users; they are accustomed to relatively ignorant “consumers.” Empowered users are very different; it’s a collaborative relationship.

Defending Your Home Market(s)

You can create a strong sustainable home court advantage in your home markets by developing and leveraging your home market cultural knowledge, which will help you build better relationships with users than firms without local cultural knowledge. Our context in this use case is developing relationships and trust in the service of users who want better outcomes when using your product or service. The firm that provides the best outcomes wins. The Social Channel teaches that better outcomes arise from collaborating with users, so home cultural fluency will help you do that better, faster.

This section will be especially relevant to companies in mature (erstwhile “advanced”) markets who face growing challenges from foreign manufacturing (and service) firms. Such firms often have lower cost inputs and can field better product features at significantly lower costs. That said, this section is equally useful for emerging markets that wish to defend against outside challengers.

• Social Channel Two lays out specific steps to pursue social business evolution in your front end and back end business processes, so this section adds to it with the goal of “defending” home markets against foreign firms.
• One of the key goals in front end innovation is identifying your firm’s most relevant users, noting where they prefer to discuss topics relevant to your products/services. While observing these users and interacting with them, you create models of their use cases for your products/services. A use case defines a limited range of situations in which they consider products like yours to help them achieve a desirable outcome. They evaluate options, choose one (yours, competitor’s), use it and obtain a result. For example, you sell forklifts for warehouses. You add the most value when users face certain situations. Define several use cases. With social business, you can ask clarifying questions in forums to get input very quickly to evolve your use cases.
• Now examine your use cases and apply cultural filters. For example, foreign competitors may offer longer battery life, more powerful motors, etc. They may offer superior machines for a lower cost. However, by focusing on users’ utility of the forklift, you discover that training and maintenance are higher because documentation is not as easy to understand, and communication with service organization is incrementally more difficult (even if they’ve contracted with a local service firm, that’s one step removed from the OEM).
• Take your culturally filtered use cases and enter conversations online that focus on them. Users who have tried foreign OEMs and experienced subpar results will be talking about it. Serve these users by providing helpful hints, not selling or knocking competitors. You will build an excellent reputation and communicate your message to other people in the venue/forum/conversation: “You can improve your utility and quality of outcome.”
• Foreign OEMs will find it challenging to enter such conversations because so much of detailed conversations about business challenges and solutions is between the lines; they are very difficult for people without deep cultural fluency. Some OEMs will try hiring social media firms to “communicate” on their behalf, but such efforts will only make them look worse: users don’t want to be promoted to, they want firms to relate to them, to listen and to communicate honestly. Hired hands don’t do that well. Neither do they have the domain knowledge (warehouse operations).
• Once you have established yourselves in several venues, you can start asking users for input and ideas into your service and training programs, for example. When you act on their ideas, they will turn into raving fans.
• As long as these conversations are taking place in public forums, you can quote from them on your website, etc., significantly leveraging the credibility you’ve developed in-venue.
• You will significantly increase the chance of success when you form a small social business team of people with explicit cultural experience, knowledge and awareness. Most natives are painfully unaware of culture unless they have had significant experience working and living abroad. In this case, you want natives (on your home country) with cross-cultural experience and relevant domain knowledge (warehouse operations). They need to write down (“codify”) the market cultural knowledge they identify.
• The social business team should develop explicit competencies that they can teach others to scale the effort. Since most employees in the home market are culturally fluent, increasing their awareness, so they can interact in social venues very effectively will be very straightforward when the team is identifying social business good practices and codifying them digitally. We call this a social business competency team.

Developing Foreign Markets

This use case employs many of the same principles as described in “Defending,” but the context and aim are different. Here, you want to use social business to engage users in “foreign” (to you) markets to expand your business across borders and cultures.

• No matter the market, people there are devoting their time and effort to get done the most important things in their lives. Even “social” activities like swapping sports statistics may seen inane, but people are spending the time to build their reputations, friends and networks. Their social position within the network. This is a very serious activity for humans and other primates.
• Therefore, your mission is to understand what they are trying to do and to help them in unique and memorable ways. Think of culture as a lens that can change the context of users’ activities. To succeed, you will have to build an explicit understanding of the cultural aspects of users’ behavior that are relevant to how they use your product/service. For example, culture affects how people work and use your product. Maybe the culture likes to drive forklifts faster, which affects usage and maintenance.
• The beautiful thing about social business is, you can begin your mission anywhere. You need not invest in in-market offices or teams right away, although you may want to for other reasons. Because we are constrained in this mission to online conversations, the first step is assessing online activity for use cases that are relevant to you.
• You will need to invest in hiring or contracting 1-3 people with in-market language skills (your scope team). They will also need a rigorous search and analysis approach to ensure that the assessment is accurate. Make sure you understand the difference between language proficiency and cultural fluency. They can overlap, but they are entirely different things.
• In some cases, depending on the country’s population and the users you want to engage, your home language might offer an initial proxy if it is widely spoken among the users in whom you’re interested. But you are always better off “going native” because you want to understand users’ context.
• If you establish that significant conversations are occurring in social venues in your desired market, develop formal use cases and apply cultural filters as described above. It can be useful to compare these to your home market’s use cases and cultural filters if you have done them. I recommend doing yours first because it will make your team aware of the process, goals and outcomes. But it isn’t absolutely necessary.
• You can begin interacting by asking the scope team to begin engaging in the venues you’ve been observing. As described above, you need to have them codify (write down) the market cultural knowledge they develop. You can grow your team of contractors or employees without even opening an office!
• By interacting in social venues, you can test your understanding of users’ goals and your use cases and refine them rapidly. As stated in “defending,” you will use this knowledge to scale the effort.
• I hope you can see that social business changes the economics of developing new markets for firms that understand how to do it right. Based on results, it will be to your advantage to spend time on the ground. Depending on users’ online habits, you will do best to flesh out your understanding (developed at low cost online) by getting across the table from them in-market.
• By understanding users, you can create use cases for your product/service before you invest in “bricks and mortar.” You can significantly increase your chance of success and reduce investment risk.

Conclusions

• Brands have bandied about the term “customer intimacy” for years, but they haven’t had to deliver in transparent social venues—until now. Users will increasingly demand it, as sure as they demanded websites of brands and firms by the early 2000s. In virtually every context, the better a brand listens to, responds to and helps people shows that it cares and wants relationship. The 20th century version was putting happy stock photos on the website accompanied by snappy copy. This is threadbare today because it is insincere, impersonal. When the brand couples listening and responding with transparency about its business, including shortcomings, intimacy goes through the roof—with users who want it.
• Culture is a critical element of intimacy, so it can serve as a barrier that firms can use to defend “home” markets, as defined in geographies in which they have significant native cultural knowledge. Firms without in-market cultural knowledge will struggle more to develop intimacy with users.
• Similarly, any firm can develop intimacy with users in any market, provided they do their homework, learn about users in that market, listen extensively and build cultural knowledge explicitly. They can build a team and scale the effort as they see business results.
• Social business can significantly reduce the time and cost of developing new markets. It can serve as a low cost “tip of the spear” since engagement is online, teams can be virtual and venues are online. It is best used in concert with on-the-ground engagement initiatives, but these can often be postponed pending social business results.
• The Social Channel can serve as an authentic bulwark against “foreign” competitors. I write “authentic” because, in this case, I’m proposing that firms use their native cultural fluency to add more value to their users; keeping “foreign” competitors out of markets as an end in itself destroys value for users.
• With multinationals, it can be difficult to ascertain what their “home country” is. The context here is economic, not political. Whereever they have significant native cultural fluency can be seen as a “home country.” Who’s Afraid of Huawei? suggests that political posturing against Huawei may be disingenuous; most “advanced” economy firms have their gear fabricated in China anyway.
• Executives and teams that lack in-depth experience developing relationships in digital social venues will likely miss the importance of intimacy and culture. This is quite understandable because firms have never had true relationships with users (erstwhile customers, clients) before. Prior to digital social venues, there has been no economic means of “connecting” with users.

The post The Global Social Channel: How to Compete Globally appeared first on Christopher S. Rollyson and Associates.

This post originated at CSRA's blog. Please share your thoughts and comments here. Thank you.

U.S. at Turning Point with Global Economy in the Balance—A Lack of Courage?

James W. Owens, Chairman & Chief Executive Officer of Caterpillar Inc., beseeched U.S. business and government leaders to find the courage to save free trade. The speaker at the Executives’ Club of Chicago’s Global Leaders Series, Owens addressed a packed house at the Hilton Chicago on 16 October 2007. His speech was immediately followed by the Club’s Technology Conference at which CIOs advised their peers on the emerging role of the CIO in the “networked economy 2.0.”

A Ph.D. economist with extensive global management experience, Owens made a very convincing argument that the U.S. and the global economy are at a turning point. It is time for the U.S. to lead by example to assure the continuance of the free trade juggernaut that has produced so much wealth in the world. If it fails, the world stands before the prospect of sharply curtailed trade.

Following a summary of his remarks, I will offer conclusions and analysis of related market developments. Although he limited his remarks to business leadership, I will also argue that the U.S.’s lack of resolve and leadership is multidimensional, notably with respect to the environment. Moreover, economic and social forces are going to confront the definition of the sovereignty of the nation state due to the collective destiny of all nations due to trade and the environment. In other words, Owens’ remarks may be far more applicable than he suggested.

Caterpillar as an Example

• Caterpillar is a poster child of free trade success that is benefiting tremendously from China’s and other emerging economies’ demand for heavy equipment with which to build infrastructure. Cat is #1 or #2 in all its markets, and services now comprise 35% of its revenue (logistics, finance). They are growing quickly as a portion of the total.
• Cat dealers are a key par of their local presence around the world. The company sees them as partners. They are crucial to Cat’s global footprint and strategy to be close to customers. This is good for relationships, and it cushions the company from exchange rate risk.
• Following the Asian crisis in 1997-1998, Cat retrenched and increased its footprint significantly. When Asian economies took off again, Cat grew explosively.
• Caterpillar’s “Vision 2020″ program is focused on operational excellence along the lines of Toyota’s vaunted Philip and approach. Specifically, Cat is focused on safety, decreased repair frequency and just in time production.
• Owens stated emphatically that Cat was a better company due to competition. Competition makes the company stronger.

Emerging Markets’ Impact

• 2004-2006 has been the best global GDP (Gross Domestic Product) growth since (the end of) World War II.
• Caterpillar’s destiny is obviously linked to emerging markets’ demand for its equipment to build roads, buildings and other infrastructure, but the demand for other companies’ goods and services are also linked to emerging markets, even if their leaders do not appreciate it yet.
• Asia has achieved escape velocity: its growth no longer depends of U.S. and European demand, although they represent large demand. Asian demand is growing fast as a percentage of the total. Asian nations no longer depend on FDI (foreign direct investment) for their growth because there is so much money in Asia itself.
• Owens believes that global growth will “probably” be strong for the next five years, although 2008-2009 will be “anemic.” If the U.S. achieves a soft landing in 2008, 2009 will accelerate.
• The U.S. only represents five percent of the world’s population, and most of U.S. GDP is earned outside the country. (He did not say that the population percentage is falling, nor that the non-U.S. percentage of GDP is falling).

The Gauntlet—The U.S. Risks Capitulation at the Crucial Moment

• Protectionism is rising to dangerous levels in the U.S. Politicians and most U.S. citizens do not understand how free trade contributes to the strength of the U.S. economy. For more on this, see The Transatlantic Partnership and Its Implications for U.S. and E.U. Economies.
• U.S. President Bush is having a very difficult time getting CAFTA (Central American Free Trade Agreement) and free trade agreements with South Korea, and this sends a terrible signal to the world: the U.S. does not want to take any risks, to open its markets or to share its destiny with friendly nations. Colombia and Peru need U.S. support to continue to pursue a free trade agenda and move toward democracy. (This against the backdrop of increasing socialism in Latin America and open hostility of Hugo Chavez).
• Owens worries that the U.S. has lost the will to compete, the courage to do the right thing and the confidence to embrace other nations. U.S. congressmen have passed 94 anti-China bills, and their constituents clamor for more. China is not perfect, but they have made tremendous progress, and their progress drives the demand for an increasing portion of U.S. companies. We are at risk of a U.S.-China trade war.
• We need to reactivate the DOHA round of trade talks; the U.S. currently collects more (trade) duties from poor countries than from wealthy countries (due to skewed bilateral agreements). That is sending an unfortunate message to the world.
• Immigration has always been a cornerstone of the U.S. success model, but we are in danger of dropping the ball at a critical time. “What kind of universities do we want?” Owens asked. Current immigration policies make the U.S. an unattractive place for the world’s best and brightest to come and study. For the few who come here to study, we make it virtually impossible for them to stay and work. We should give them green cards when they graduate. (by not doing so, the U.S. is exporting knowledge).
• There is no intelligent immigration discussion. Twelve million Mexicans are at risk of being deported because they are here illegally. If the U.S. deported them, the economy would shut down.
• The U.S. has the second highest (corporate) tax rate in the OECD. The U.S. taxes all income, no matter where earned, and this keeps jobs outside the U.S.
• The looming U.S. Social Security and health care crisis drive up U.S. employee costs, and there is no honest bi-partisan discussion about the problem or a solution. There is demagoguery, no accountability.
• From a performance perspective, the U.S. labor market is competitive, but other nations are emerging to challenge. Caterpillar workers in Brazil are top in class, and Chinese workers are incredibly motivated, hungry to succeed and willing to go the extra mile. Owens didn’t explicitly say it like this, but the flavor was, “It isn’t so much the wage differential but the motivation and determination to succeed” is where U.S. workers are losing ground. He did say, “What happened to our can-do attitude?”
• Cat has been in China since the Nixon era, and they formed JVs (joint ventures) in the 1990s. They have rapidly expanded their China operation, and ” China is the best startup we’ve ever had” due to the motivation of the workers, their openness and willingness to learn.

Analysis and Conclusions

Trade

• Owens’ simple and powerful message really resonated with me. The U.S. is a market leader in many industries, culture and global politics and, as such, is invested in the world the way it is now. The message was well suited to the audience, many of whom lead market leading companies that are the ones to beat in their markets. Owens painted a clear picture of the U.S. as a leader facing the prospect of decline, but such a decline would be voluntary. Basically, it comes down to this: does the U.S. have the will and courage to take the risks of more openness? This is a very real risk: if the U.S. is not competitive, it will be outperformed in an open market (it would be outperformed in closed markets, too, but that would be more difficult to see).
• The U.S. has much to lose if trade wars—or lack of continued liberalization—ensue. The problem is, most U.S. citizens do not understand how their destiny is being determined by global trade. U.S. workers and congressmen blame global trade for the disruption being caused by the shift to the Knowledge Economy. In fact, significant disruption to workers and markets will happen whether markets are open or closed.
• The U.S. is accustomed to being the challenger and to having the advantage in open markets. U.S. companies and workers are still competitive, according to Owens, but unless they muster the courage to compete, they will lose their leading market positions.
• Virtually all product-oriented business face commoditization because their production capacity has outstripped demand in mature markets (i.e. the U.S., Europe, Japan), where populations are declining or flat. Therefore, demand growth of most product and service businesses is linked to emerging markets, where growth will be significant for years.
• If U.S. protectionism precipitates in trade wars, the U.S. will lose far more than it will gain: it will risk being frozen out of fast-growing Asian emerging markets, which will turn to China, Japan and India for leadership.
• The shift from the Industrial Economy to the Knowledge Economy has displaced industrial workers, who are being confronted with transforming themselves into knowledge workers. An increasing portion of product value is knowledge or information around the product. Innovation will be the value-producing calling card of the Knowledge Economy, and it is knowledge work par excellence.
• A miniscule portion of U.S. congressmen have stepped outside the country. They do not understand the U.S.’s global role.
• It is a gross simplification with an element of truth that the U.S. should bear in mind that the U.S. was the economic supernova of the 20th century, and it must now share the sky with China, India and other emerging powers. What can the U.S. learn from its experience as an emerging economic colossus and apply that knowledge to China?

The Environment

• The U.S. has lost its moral authority to lead on the environment. The U.S. has consumed more fossil fuels and other natural resources than any other country since the 1950s, and the country produces most of the world’s greenhouse gases and much of its air pollutants. China is rapidly developing an appetite on a U.S. scale.
• For more on China, the U.S. and the environment, see my coverage of the Economist/WBEZ debate, Will China’s Rise Lead to an Environmental Catastrophe?
• U.S. citizens have lost touch with reality, and European consumption is also high. Their consumption levels were predicated on the rest of the world consuming little, but the global consumption picture is rapidly changing. The other side of such consumption is pollution and damage to the environment. The U.S. is the world’s most profligate polluter according to almost any standard.
• As I have written for years, China’s growth gives leading nations an opportunity to transform their roles from adversaries to collaborators. China’s growth and the growing scarcities of natural resources will force consumptive countries to become more adversarial or collaborative. The world is becoming smaller, resources are finite, and all people increasingly share a collective future. Our only choice is how we deal with that reality. More on this here.
• The U.S. can reassume moral authority by taking the lead on adopting stringent environmental steps and sharing technology and approaches with China to alleviate its catastrophic environmental problems. No major resource consuming country can “make its own way” anymore—the earth is too small.
• Mankind will be forced to approach its stewardship of the earth as a collaborative activity, and free market ideas can help. One of the most fruitful areas of collaboration will be crossing economics with environmental science. For example, many citizens of rich countries are angry and frustrated at the deforestation of the Amazon and in many parts of Asia. They correctly understand that this risks impoverishing the land and destroying huge carbon processing factories. But they have no moral authority to determine other countries’ affairs because they are wealthy and consume a huge portion of the earth’s resources and contribute to its carbon pollution. Why not make it economically attractive for nations with lush forests to keep them? As inhabitants of the earth who love fossil fuels, we depend on carbon processing factories, so why not pay for them and issue lucrative carbon payments to forested countries for their carbon processing services?

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This post originated at CSRA's blog. Please share your thoughts and comments here. Thank you.

Political Insight into the Global Knowledge Market

The Strategic Management Association, the Harvard Business School and the CDMA sponsored the 2007 China Outlook, which was given by Lyric Hughes-Hale, Founder China Online in Chicago 9 January 2007. Her presentation was preceded by David Hale’s 2007 Economic Forecast. As a long-time China watcher and analyst, Lyric has rare and unusual insights to which I’ll try to do justice before giving my observations. The Global Human Capital Journal also covered the 2006 China Outlook.

Lyric’s China Outlook reflected global political transformation and how yesterday’s Cold War politics are becoming more outmoded with each passing quarter. She didn’t say it directly, but her comment about increasingly irrelevant organizations like the World Bank could easily apply to governments as well. Democracies and legal agreements increasingly lag technology development, and the gulf between them is accelerating. Are they becoming less relevant or effective? China is not burdened by dissent, which currently seems to add to its competitive advantage because it can move quickly and decisively.

Refreshingly, Lyric sees that the biggest threat to the U.S. is its leaders’ own limited thinking, which is causing them to lose tremendous opportunities to engage the world. Here are her remarks, from my notes:

• Climate for global trade: 2006 continued to see the rise of regionalism as the dream of international institutions faded.
  • The Doha Round is failing, and international organizations like the World Bank and the World Trade Organization are falling apart. They cannot reform themselves fast enough to keep up with globalization and remain effective. New institutions will emerge.
  • Bilateral trade agreements are inefficient creators of economic value (when compared to global agreements), but they are increasingly being done as global initiatives fail (Doha). In North America, NAFTA will grow. The European Union is growing in scope. Tremendous regional growth in Asia will continue, and an Asian trade block will emerge (like the E.U.).
  • Technology is far ahead of legal consideration, and it is accelerating, so the gap between them is widening. Intellectual property rights and digital rights are two battleground. This affects the value of all kinds of goods.
  • National resource-based economies always struggle because power is always concentrated in the hands of the few, and corruption is rampant. Current examples are Russia, Nigeria and Sudan. Benefits do not trickle down to create wealth among all classes, causing political instability.
• World leadership: times are changing:
  • As a world leader, the U.S. has lost a tremendous degree of respect in the world, and we will increasingly be stymied in achieving our initiatives due to increased suspicion and objection. Bush has lost credibility, and most U.S. leaders do not fully appreciate this.
  • Surprisingly, China is seen as a more moderate, rational power by many. The U.S. is increasingly perceived as revolutionary, not rational or impartial.
  • This situation is reflected by the weak U.S. Dollar, which will lose its status as a reserve currency. Politics trumps economics.
• U.S. quick takes: the Democrats are more sophisticated today and will not be as anti-trade as David fears. With respect to the dollar’s value relative to other currencies, U.S. buying habits are more relevant than the fundamentals.
• The new Asia: look beyond yesterday’s paradigm: the two fastest-growing economies in Asia are “Communist” regimes that are mandating economic “experimentation” to achieve their political ends, China and Vietnam. The rest of the world needs to reexamine its pre-conceived notions to understand this shift. The U.S. and other democracies are stratified and cannot keep pace.
• China-U.S. dynamics:
  the U.S. and China are increasingly interdependent: 
  • U.S. companies’ profitability and stock prices are driven by ever-higher levels of dependency on Chinese workers to keep prices low. Chinese serve as “shadow employees”; they are largely invisible to consumers.
  • Shadow workers have contributed to wage stagnation in the U.S., Japan and Europe for the past several years.
  • Competition to keep prices low (and market share up) is relentless. Chinese wages are increasing, and productivity increases will fail to maintain the price/quality ceiling, and we will see widespread quality issues.
  • China will increase its competitiveness by launching global brands and selling direct to consumers worldwide, bypassing multinationals. They will take out U.S. companies and maintain their profits.
• Middle East: this is another area in which the U.S. must change its perspective:
  • U.S. leadership has tended to demonize people and governments that do not agree with its initiatives. Iran, along with North Korea and Iraq, was branded as the “Axis of Evil.” Iran has been shunned. But if one regards Iran as a nation with its self-interest like any other, it has withstood significant pressure from the international community and the U.S. Iran’s leaders are smart.
  • Ahmadinejad and Chavez are given extensive negative press in U.S. news media, but they could be seen differently, as “a new kind of leader” willing to stand up to established interests. The point is not whether they are “good” or “bad”; what is important is that the U.S. lose its outdated (Cold War) world view to regain its relevance.
  • Syria has likewise been consistently rebuffed by the U.S., and we are losing opportunities there. Assad and his wife are also smart leaders, if the U.S. would bother to really look at them. Assad is a physician, and his wife worked at Morgan Stanley. They want to reposition Syria in the world as an “emerging country.” They have launched a stock exchange and liberalized the banking system. In 2003, Syria warned the U.S. against attacking Iraq, to no avail.
  • Ironically, the U.S. has accomplished in Iraq what Iran only dreamed of, and Iran is increasing its influence due to Iraq’s collapse and the changed balance of power.
  • The Middle East’s instability is driven less by religion and more by economics, and leaders are starting to recognize that regional instability is an excuse for not pursuing economic changes. In many countries, 30-40% of the people are unemployed. Malaysia, with a large muslim population, has an unemployment level of between 3-4%, and it is very peaceful.
• India: India is already 15-20 years behind China, and the gap is widening. Its infrastructure is a drag on economic development, and 55% of its women are illiterate. Mobile phone penetration is relatively low. These weaknesses will continue to compromise its ability to realize its potential.
• Concluding points:
  • The current U.S. leadership is a problem, and the U.S. is already far less relevant in much of the world’s eyes than it was several years ago. Its current world view is limited and compromises its leadership.
  • The U.S. needs to experiment more by engaging leaders with new ideas. For example, it continually spurns Vietnam, which is very open to it. There are opportunities to open dialogs with Iran and Syria.
  • Globalization is an environment in which U.S. leadership would be very natural, as the country has traditionally been diverse, flexible and open to change. It is an ideal, not a place.
  • Unfortunately, the U.S. has a militaristic viewpoint that will probably result in a war with Iran before the end of Bush’s presidency.

Analysis and Conclusions

• Like many other transformations, globalization can be deceptive—not because deception is inherent to it, but because the observer is limited in his understanding. We humans learn by experience, and we find it difficult to “unlearn” lessons of the past that are either untrue in the new environment or are true in a different way. As I have written elsewhere, leaders have sung the praises of globalization so long that it seems a familiar tune, but that leads to problems when additional verses are in different languages. For example, captains of industry and government began talking about it within the Industrial Economy paradigm, and that still colors their thoughts. It used to carry an imperialist flavor.
• As I wrote in The TransAtlantic Partnership and Its Implications for U.S. and E.U. Economies (see World Turning), the terms “first world” and “third world” are trappings of the Industrial Economy, where political and industrial power was determined by countries’ ability to exploit their natural resources. In the Industrial Economy, geographical position (geopolitics) was held to be of paramount import; in the Knowledge Economy, geopolitics warms the bench in favor of regulatory environment (witness the continued rise of London as a financial center at the expense of New York; London uses [less] regulation as a competitive weapon). Because people, education and knowledge work produce most value-add, economic development can be much faster and the balance of power changed. This shift will catch many leaders flat-footed. In the Knowledge Economy, traditional levers of power are not as relevant, and new ones emerge.
• In a sense, the U.S. “won” the Cold War, but this has led to serious lock-in in which leaders want to remain in the past in which they prevailed rather than embracing the present. Today, “Communist” is increasingly out of the context in which it was born.
• Of course, oil is very zero sum. Finding alternative energy is far more important than going to the moon ever was. There should be nothing less than a no-holds-barred effort to develop other energy sources.
• Lyric’s mention of technology and digital rights reflected the Knowledge Economy shift. The Industrial Economy was a zero sum game because it was built on transforming raw materials into goods as efficiently as possible. Conversely, the Knowledge Economy creates value from information, which is far less zero sum. This will undoubtedly change the context around ownership. In a raw materials context, exclusive use was extremely important. In the new environment, it is less so.
• The conventional view recognizes that China is a tremendous industrial power, but its rapid progress on the banking system and the torrid development in Asia will rapidly transform it into a banking powerhouse and financial center.
• The Knowledge Economy offers a fundamentally different way to create wealth, which is not based on raw materials. As cities look to Silicon Valley as the paragon for technology innovation, countries look to India and China as examples: they are “third world” countries rapidly ascending to first world rank.
• Lyric implied that democracy was a competitive disadvantage (from a strictly economic point of view) because it leads to extensive discussion and lack of action. An interesting idea to ponder.

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In an example which I’ll prophecy will become increasingly commonplace, China is showing itself to be very innovative in health care by implementing market-based offerings. The TEDA International Cardiovascular Hospital, just outside Beijing, offers six levels of service, ranging from $6.70 to $3,200 per night, as reported in “Hospital Caters to China’s Wealthy and Poor” in The Wall Street Journal or the hospital website. The lowest class of service has patients sharing a small room with other patients while “first class” includes a suite with a private gym, a garden, massage chair and other amenities.

China has an aging population of 1.3 billion to whom the government is struggling to provide health care. It regulates the prices of medicine and subsidizes basic services at public hospitals, but most people do not have western-type insurance and end up paying a major portion of their health care. The stakes are high today to solve the health care problem, and they are getting higher as the population ages.

This experiment is enlightening for what may be possible in western countries if they can improve pricing transparency and digitize work processes.

Market-style Experiment: The Wealthy Subsidize Treatment for the Poor

Liu Xiaocheng, the hospital’s president, studied medicine in Australia for several years, and he returned to China specifically to help reform the healthcare system. Dr. Liu’s experiment is seen as a new model for health care that attempts to deliver on Communist ideals while using market-based methods. For example, the TEDA International Cardiovascular Hospital is sleek and ultra-modern, and it outsources cleaning, food, laundry and security and has dispensed with lifetime contracts that are common with state-run hospitals. It also fires people when necessary.

Thus far, Dr. Liu has been able to get support for the model because the core resources are excellent, and they are available to all patients. People travel from all over China for treatment, and Canadian and U.S. Chinese also seek treatment there. The hospital can deliver care much more cheaply than state-run hospitals due to its efficiency and the fact that wealthy patients pay far more.

“It’s just like an airplane,” says Dr. Liu. “In the front of the plane, they have the first class.. and in the end they have economy class. But they’re all going to the same destination. It’s the market!”

Analysis and Conclusions

• The article implies that the quality of the core services provided is high for all classes of service, but the hospital delivers the ancillary services in much different ways. If true, the approach is very interesting—and applicable in the U.S., which is slowly moving toward “consumer-directed healthcare,” which seeks to give patients choice and accountability for making decisions about their health care.
• The hospital’s ability to pursue this model successfully largely depends on relatively transparent costs, which are critical in creating the different classes of service. It is a strong argument for increasing price and process transparency.
• Legacy health care in western countries struggle with price transparency due to the oft-antagonistic nature of providers, payors (whether government or private) and consumers. No party has been directly accountable for the cost of health care, which is one reason why costs have been spiraling out of control and show no signs of stopping.

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This post originated at CSRA's blog. Please share your thoughts and comments here. Thank you.