Musings on Entrepreneurship and Innovation
Thursday, June 24, 2004Mindset as Strategic Prerequisite
In today's New York Times, Thomas Friedman quotes Win Liu of DHC in Dalian, China:
I've taken a lot of American people to Dalian, and they are amazed at how fast the China economy is growing in this high-tech area...Americans don't realize the challenge to the extent that they should. I do have confidence in the American people, though, to take the challenge.
My colleague Don Greer has said that productivity is a function of toolset x skillset x mindset. That is, you need all three to be positive in order to build capacity. In the transition from an agricultural to an industrial economy, tools were tangible, physical, and had a fixed location (e.g., a Ford automobile factory). The pace of change was set by the pace people actually moved from the country to the city. Service-based economies, too, tended to grow around accumulations of populations or population flows (e.g., tourist-based businesses). However, with the emergence of affordable, timely, transportation and communications systems, service industries began to disconnect from population centers (e.g., call centers and companies such as Lands End and PC Connection). The requisite toolset came to be defined by creativity and coordination skills. That is, the means of production became abstract and located between peoples' ears and generated through the interactions among people.
In Adaptive Enterprise, Stephan Haeckel notes:
Without a theoretical basis for measuring the economic value of knowledge, databases costing billions of dollars as well as most of the knowledge in employees' heads cannot and do not appear on corporate balance sheets.
Well, the only time such value is capitalized is as a result of certain types of acquisitions, when the excess of the purchase price over the value of the net tangible assets is booked as goodwill and other intangibles. As recently as 1978, The Brookings Institute calculated that tangible capital accounted for over 80% of the market value of large, publicly traded companies. By 2002, The Wall Street Journal, estimated that ratio had fallen to 30% to 40%. In other words, even with under reporting of the value of intangible assets, intangible assets still represent 70% or more of businesses' market value.
In the not too distant past, having an entrepreneurial, business-oriented mindset wouldn't get you very far if you didn't happen to be co-located with the requisite, tangible tools of production. Without the latter, skills couldn't develop, either. Today, on the other hand, mindset comes to the fore.
Here in Montana, we have numerous advantages over the majority of the world: We are part of an enormous free trade zone; the rule of law is well established; our transportation and communications systems are excellent; and we have a well-educated population. In places where an entrepreneurial mindset has taken root, high-growth, productive companies have emerged (e.g., RightNow Technologies, and PrintingForLess.com). However, the mindset of a significant part of the state is still characterized by a focus on a service, industrial, or agricultural economy. Even if the means of production in a knowledge economy aren't as tightly tethered by geography as its predecessors, capacity won't be built unless there is a corresponding shift in mindset.
The knowledge economy and high technology are often viewed as being synonymous. Highly correlated? Yes. Equivalent? No. Information technology allowed the financial services industry to change from being tethered to physical assets (e.g., gold and branch offices) to being driven by the creation of abstract risk-sharing and risk-shifting financial instruments (e.g., swaptions). The value created by organic food producers is as much about and understanding of ideas about food as it is about agricultural production - maybe more.
China, for all its immense challenges, is apparently full of people who have adopted the mindset necessary to create wealth in a knowledge economy. Tools and skills will follow, and may accumulate at a rate that continues to astonish. People in places that have achieved a level of comfort based upon past economic success are, maybe understandably, reluctant to take the painful step of changing their own mental models, their mindset. It's understandable, perhaps, but not okay. The economics of information and knowledge differ in important ways. Change is accelerating - inevitably. What is not inevitable is our response to that change.
I share Win Liu's optimism about how America will respond. But, I still hear those footsteps.
