(update; as of November 2012, The Monitor Group headed by Michael E. Porter, the subject of this article, declared bankruptcy ending an era of C-Suite omnipotence strategy thinking.  This article compares competitive strategy to collaborative strategy)


The B-School staple “Porter’s 5 Forces” has been the mainstay of corporate competitive analysis since it’s creation in 1979 by World regarded Harvard Business School Professor, Michael E. Porter. Porter developed a model of industry analysis in his seminal book,  Competitive Strategy: Techniques for Analyzing Industries and Competitors

In short, a competitive company’s position in a market is threatened by five main forces acting on the corporate asset:

  • new competition,
  • substitute products or services,
  • bargaining power of customers,
  • bargaining power of suppliers,
  • intensity of competitive rivalries.

Any changes in these 5 forces would be cause for the company to re-evaluate their place in the market … thus leading to healthy consulting practices for strategists the world over.

The Rate of Change

In the 1990’s critics began to argue that Porter’s 5 Forces thesis assumes that the forces are static and non-related.  At the time, the world was becoming more dynamic and more interrelated. For example:

  • Buyers, competitors, and suppliers can interact, and even collude.
  • Value cannot be created in the long run by constantly introducing barriers to entry
  • Participants in a market have the ability to plan and respond to competitive behavior.

As a result, they added another Force called “complementors” while introducing rudimentary game theory to explain the role of strategic alliances to the analysis.

Constant Change

Now in the year 2012, we routinely assume that all players can instantaneously access the same real-time dynamic market information from the cloud.  We readily accept that all players will collaborate massively with whomever they want from anywhere in the World.  As a result, we must assume that all five forces will change constantly and rapidly in real time.

Now imagine how 1990’s game theory would manage conditions where the company AND their competitors must continuously re-evaluate their position in a market under the circumstances of continuous change.  In effect, nobody has the ability to compete with each other, they are competing with the game, therefore, they are cooperating to keep the game in play.

Is Collaboration Underrated?

If any player tries to introduce a barrier to entry, THEY risk get knocked out while the game continues without them. In fact, value is created by applications that remove barriers … and brokers are punished. All of these factors cause the game to self energize and improve as players preserve the asset rather than consume it.

The Value Game

It should not be surprising therefore that Porter’s 5 forces now resemble what we call the Value Game that we have described here (and here, and here).  In the ultimate manifestation, however, The Value Game will play automatically through multiagent algorithmic game applications where tangible and intangible assets would be accounted equally in a Value Game. Individual would own, manage, and deploy their secret sauce of knowledge assets through their personal API that interfaces with the game that is most relevant to their highest abilities.

Where competition has met it’s match

Remember that little regarded fact of Capitalism: Markets are efficient where there is perfect information.  This means that if everyone involved in a transaction has the exact same information as everyone else, the true supply can meet the true demand.  Nobody ever said that this must be accomplished through competition especially if collaboration can do it better.

1011442.largeObviously data are related to information and information is related to knowledge and knowledge is related to innovation and innovation is related to wisdom (whew!). But how are they related? What few people realize is that if you take out any of these components, the whole relationship falls apart.

data > information > knowledge > innovation > wisdom

For example, if data are corrupted, then everything that follows becomes corrupted; hence the advanced mathematical equation: “garbage in = garbage out”. Few people realize that at the end of the relationship, the wrong wisdom creates the wrong data and therefore “garbage out = garbage in” starts the process all over again.

Going from one component to the next is called transformation. If the transformation fails, no value is created. Google Transforms data into information. Human intellect transforms the information into knowledge. Knowledge is shared among other people and transformed into innovation. The success and failure of innovation is transformed into wisdom. Community wisdom, through the behavior of individuals, is transformed into data.

Entrepreneurs are concerned with transformation – this is where value is created. The entrepreneur identifies assets operating at a lower level and transforms the asset into a higher level. That is what entrepreneurs do.

The key to monetization is not coffee beans, it’s the transformation of $0.20 worth of coffee beans into a $2.00 Latte.

Transformation is where the most value is created, but it is also where the most risk exists. As such, it is the area where most entrepreneurial opportunity exists to manage risk, eliminate risk, diversify risk, and mitigate risk. To control the node of the transaction is to control the entire transaction. This is where the garbage enters. This is where the garbage is eliminated, this is where the garbage moves on. It’s all about the transformation.

Any asset that fails to change fails to remain an asset. Value is derived from the rate at which assets change. If I produce more in less time, I become more valuable. The RATE OF CHANGE in a phenomenon carries the most interesting and valuable information about that phenomenon. This is an important distinction that many people just cannot wrap their heads around – but they must if they hope to prosper in the next economic paradigm.

Transformation of the wisdom of crowds in social media is the next great opportunity, don’t trash it.

Calculus-fullYes, we know that social media is humongous. Yeah, we’ve all heard the 10 amazing ways to “fill-in-the-blank”. Nope, you are still not allowed to shove your products down the consumer’s throat until you have earned their trust.

Now, all of a sudden, a new idea is emerging…it’s barely an audible chirp, but it will become a tectonic rumble before long:

Social Media is beginning to take on the characteristics of a Financial Instrument.

This is a stunning development with vast implications. Allow me to interpret this excellent article by the respected visionary, Brian Solis, as a basis for my argument.

One thing that everyone can agree on is that “information”, “knowledge”, and “innovation” are related somehow. The problem is that nobody can agree about exactly how they are related. None of the definitions for these terms include the adjacent terms and no algorithm exists which performs the conversions, until now.

Now comes the interesting observation:

They say that Google ranking represents a proxy for knowledge in a knowledge economy. What they mean to say is that the rate of change of information with respect to time can be used as a proxy for real-time knowledge. This is a valid idea because Google organizes the World’s information based on time rates of change of the Information.

Yet “knowledge” can only exist between the ears of breathing, thinking, creating, and acting human beings – one important component for which Brian expands the term “Social Capital”. If we carry his observation one step upstream, we should be able to also say that the rate of change of Social Capital (a component of “knowledge”) with respect to time is a proxy for real-time innovation.

Now this idea should be pegging seismographs and flooding the Valley with the ensuing tidal wave of glee. The implication is that we can now identify and organize innovation by simply measuring the rate of change of knowledge with respect to time that an enterprise induces among social networks in a market. Alas, we can now see the direct Integration of Social Media into the business plan.

Calculus is the science of change.

Definitions are fluid, they must change. Brian Solis has, in fact, introduced the construction of what scientists call a “differential equation”. Much like “distance, velocity, and acceleration” are all defined as a rate change of their adjacent term, so too will “information, knowledge and innovation” become defined.

Economics is the science of incentives

It should not go unnoticed that Bankers are scientists too and “money, interest rate, and market capitalization” are also related by the same calculus. This makes possible the miracles of capitalization, securitization, insurance, diversification of risk, options, hedge funds, etc… For better or for worse, Wall Street lives and dies by this algorithm and so do we.

Let me repeat; social media is taking on the characteristics of financial instruments.

Please, I hope that I am not alone in celebrating this historic moment. Few people may recognize this now, but mankind has just experienced an evolutionary leap in it’s understanding of it’s own nature. Bravo Brian, Bravo.

image credit

Problems and opportunities are moving very fast. Problems are often so complex and so integrated across the globe that no single person can accumulate in a lifetime the experience needed to manage effectively.  The “top-down” management structure no longer has a statistically relevant sample of prior experiences from which to make essential decisions. Actions without wisdom have unintended consequences for yet unknown victims.

The Wisdom of Management

Managers manage through experience.  After many years in an industry, they can observe a situation and compare it to prior situations that they have encountered either through experience or formal education.

An effective manager can identify an issue, determine the probability that it will become a problem, and discuss the consequences of action or inaction.  Then they make similarly calculated decisions that either solves or manages the consequences of the problem.  The depth and breadth of a manager’s experience is called wisdom.

Duplicating Wisdom

In order to duplicate wisdom in a laboratory, scientists generate statistical events.  By duplicating a scenario 20-30 times, a range of outcomes becomes statistically relevant for predicting future outcomes and identifying the way things can influence the outcomes.  The idea behind the peer reviewed journals is to display the experiment to everyone for vetting.  If it survives vetting, it becomes part of the human body of knowledge until otherwise challenged.

Managing consequences

The rate of change has become extremely high and problems too complex to manage. Vetting mechanism are breaking down like levies against the dam in industries such as Banking, Insurance, automotive, medicine, education, environment, etc.  We are in a crisis of consequences where we can no longer manage the symptoms, only the consequences – forget about curing the disease.

Social Media: The Operating System of an Innovation Economy

The business plan of the new millennium will be the art and science of making information “less imperfect”.  In a condition of perfect information, everyone associated with an issue has the same information as everyone else.  Perfect information is what makes markets efficient and decisions rational.  Agreement is perfectly mutual, supply and demand are perfectly aligned, all risks are perfectly predictable and cause and effect are perfectly transparent.

Wisdom of Crowds

No single human can accumulate enough experience in a lifetime to manage the totality of human problems.  Perhaps the wisdom of crowds could be used to simulate one person that does.   This cannot, however, be a random collection of people acting in haphazard process.  The challenge is in finding the correct group of people who collectively replicate a condition of “perfect information”.  Then we must transform the perfect information into knowledge.  Finally, we need to transform that knowledge into innovation through entrepreneurial activity.

The Social Imperative

Social Networks need to form complete and detailed inventories of resident knowledge cataloged on a ‘bell curve’.  Social Networks must codify social capital, creative capital, and intellectual capital so that scientific methods can be used to predict and assemble unique collection of knowledge assets that capture statistically relevant collections of experiences. That unique set of knowledge assets must then be deployed precisely in a market.

By all indications, this is the direction that the integration of social media is trying to go.  It is now our social imperative that it gets there.

The Earth changes – it always has and it always will.  The most interesting thing about Earth is not rock, it is rate of change of rock. Yet it is this rate of change in rock that created oceans, continents and geographical features.  The rate of change in the landscape is what created and affects all humanity; global warming not withstanding.

In fact, the rate at which things change is the root of all financial deals, social interactions, creative discovery, intellectual pursuit, even criminal activity.  All value is created and destroyed in response to the rate at which something changes.  Since change is relative to time, the rate of change is something, like death, and taxes, that you can bank on.

Money, Knowledge, and Power

As a corollary; the ability to measure rates of change in things is the ability to measure value.  The ability to cause rates of change is the ability to create or destroy value.  It is therefore in our interest to try and express our world in terms of rates of change.  For example:

1    Money, interest, and stock price are deeply related.  Therefore, the rate of change of money is related to interest.  The rate of change of interest is related to growth rate.  The change in growth is monetized through a public market for its stock.  Stock price affects money and the cycle continues.

2    Information, knowledge and innovation are deeply related.  Therefore, the rate of change of information is related to knowledge.  The rate of change of knowledge is related to innovation.  Innovation creates new information.  And, the cycle continues

3    Attention, attraction, affinity, audience, and action are deeply related to each other.  Therefore the rate of change of attention is related to attraction.  The rate of change of attraction is related to affinity, etc., until finally, the rate of change in action gets everyone’s attention.  And the cycle continues.

Achilles’ Octopus

There are a few problems however.  If you remove, corrupt, or disengage any of the components, the cycle fails.  To complicate matters further, our three examples are also related: money, knowledge, and audience; stock price, information, and action; etc.

Points of failure can occur at any part of the cycle and it is often difficult to identify which failure caused what effect.   Does a stock price fail because the public lost affinity or because information was corrupted?  Does an economy fail because there is no money to invest in innovation or because our society outsources its knowledge economy?  Does a school system fail to deliver the right knowledge to society because the stock market failed or because there is no public action?

Social Media and the next paradigm of economic development

Social media allows us to express the dynamics of our world in real time and at great speed.  Feedback loops are shorter and cause and effect can be more easily differentiated.  The data that will be generated through the integration of social media will allow entrepreneurs to identify rates of change of the rates of change! Armed with computer enabled search and analysis algorithms, they can mange these complex new relationships to create value for themselves and their community in a new era of social capitalism.  Social media is a higher order calculus.

It will take everyone to accomplish this together but we can create a new landscape for our Earth, ourselves, and our children’s future.   This is change we must bank on.

Innovation: The rate of change in knowledge with respect to time 

[In earlier post we identified the 5 essential elements of a market economy. What would be the currency of an innovation economy? Currency is anything that serves as a medium of exchange, a stored value, and a standard of value. Basically we are asking; What are those things that people are out in the World trading among each other today?]

Today, innovation is repeatedly cited as the only thing that can get us out of the financial/environmental/sustainability conditions that find our ourselves in, yet the most common definitions for this term are deeply and tragically flawed.

Most definitions for innovation boil down to: “a new idea introduced that has an economic outcome” or “something new that is useful”. While these definitions match some observations, they are reflective and “You know it when you see it”. As such, there is little to define innovation before it happens or to make more of it from this definition.  It is like defining “Art” as the thing that people stare at.  Unfortunately, this is just the beginning of our troubles.

“Innovation is a new idea introduced that has an economic outcome” is impossible.

This definition defines one unknown quantity (innovation) with four other unknown quantities: what is new; what is an idea; what constitutes “introduced”; and what is an economic outcome?  From High School Algebra we know that you cannot solve one equation with two unknowns – let alone four.  There is little that you, I or anyone else can do to satisfy this definition.  Therefore, it is not useful.

Granted, this definition sells plenty of ad copy as the guru of the week wax-poetic over those four pesky unknown thingies.  I found one consultant who claims that innovation has 51 variables and only he can solve that matrix – for a price.

What is the truth about the phenomenon of Innovation?

A useful definition must clarify the subject in a manner that is repeatable and measurable.

If we look at history we know that economic “benefit” and innovation are mutually dependent – you can’t have one without the other.  Wealth has been created by increasing human productivity through innovation in agriculture, manufacturing, computers, etc.

Next, we observe that information, knowledge and innovation are also mutually dependent – you cannot have one without the other two.  Wealth is created by integrating information, knowledge and innovation.

Next; look at our society; everywhere we turn, people are collecting information from each other, building their knowledge, and innovating together, i.e., coming up with better ways to do things. All of these little exchanges obviously add up to something because things like IPods and Airplanes get built and lots of stuff rolls off assembly lines.

Innovation is anything that increases human productivity

Next we can say that information, knowledge and innovation can be related as follows:

  • Information is defined as facts and data

This should not surprise anyone.

  • Knowledge is proportional to the rate of change of information (facts and data) over time.

This is a little trickier to grasp. But any good teacher knows that information must be introduced in a certain order and at a certain speed before the information can become knowledge – this is called learning. Learning is a mental process for turning information from a book, a lecture, or personal experience into knowledge that can be used later.  Therefore, knowledge is proportional to the rate of change of information and can only exist inside a person’s head.

  • Innovation is proportional to the rate of change of knowledge over time

trickier still, but for example; everyone has had an ‘Ah-Ha!’ moment during a brainstorming session, some incredible event that we witness, or even after some real bad mistake that we made. The Ah-Ha moment is a spike in our knowledge that happens in a very short period of time. Innovation is related to this high rate of change of knowledge.  Then we blurt it out, or write it down, or make a sketch, give a lecture, in the form of information, etc.

Definition of Innovation:

a. Innovation is anything that increasing human productivity.
b. Innovation is proportional to the rate of change of knowledge and information.

Admittedly, not as sexy in the sound bite but this definition does include all conversations, sketches, dreams, and ideas of all people on Earth and allows them to combine with the sketches, dreams, ideas, of all people on Earth to become designs, methods, and processes which further combine to become products, systems, and institutions, etc.

Let entrepreneurs worry about the economic outcome

Since innovation can be difficult to observe directly. Our new definition allows us to use a proxy that is easier for entrepreneurs to see. For example; if you want to identify innovation as it is happening, simply look for high rates of change of knowledge in a community. If you want to create innovation, do things that create high rates of change of knowledge. Likewise, if you want to identify knowledge, look for high rates of change of information.  If you want to create knowledge, do things that create high rates of change of information.

We need to give the entrepreneur a game they can win. The key is that everyone must be included in the game. This is a definition that can be used by anyone and everyone, in fact, it already is.


[Anyone familiar with differential Calculus can see an equation forming where Innovation is the derivative of knowledge and knowledge is the derivative of information. Calculus is the study of change like geometry is the study of space. Since the mathematics is beyond the scope of this article, I’ll finish with the following analogy for defining information, knowledge, and innovation more intuitively: “Information is to knowledge is to innovation what distance is to velocity is to acceleration”]