If you came to the E*Trade site just three or four years ago, you would see your brokerage account on one screen page and your lending on another. Today, said Caplan, “On one page you can now see exactly where you stand in terms of your brokerage in real time, including your buying power, and you see your bank account and the scheduled payments for your loans-what is pending, what is the balance on your home mortgage, and [what is your] line of credit-and you have the ability to move seamlessly between all three to maximize the benefit of your cash.”
While Fadi Ghandour coped with the triple convergence by taking a small company and devising a strategy to make it act very big, Mitchell Caplan survived by taking a big company and making it act very small so that his customers could act very big.
Rule #4: The best companies are the best collaborators. In the flat world, more and more business will be done through collaborations within and between companies, for a very simple reason: The next layers of value creation-whether in technology, marketing, biomedicine, or manufacturing-are becoming so complex that no single firm or department is going to be able to master them alone.
“What we are seeing in so many different fields,” said Joel Cawley, the head of IBM's strategic planning unit, “is that the next layers of innovation involve the intersection of very advanced specialties. The cutting edge of technical innovation in every field is increasingly specialized.” In most cases, your own company's or your own department's specialization is going to be applicable to only a very small piece of any meaningful business or social challenge. “Therefore, to come up with any valuable new breakthrough, you have to be able to combine more and more of these increasingly granular specialties. That is why collaboration is so important,” Cawley said. So you might find that a pharmaceutical company has invented a new stent that allows it to dispense a whole new class of drugs that a biomedical company has been working on, and the real breakthrough-where the real profit is created for both-is in their collaboration in getting the breakthrough drugs from one firm together with the breakthrough delivery system from another.
Or take a more colorful example: video games. Game makers have long been commissioning special music to go with games. They eventually discovered that when they combined the right music with the right game they not only sold many, many more copies of that game, but they could spin off the music for sale on CD or download as well. So some big game companies have recently started their own music divisions, and some artists have decided that they have a better chance of getting their music heard by launching it with a new digital game than on the radio. The more the flattening of the world connects all the knowledge pools together, the more specializations and specialists there will be out there, the more innovation will come from putting them together in different combinations, and the more management will be about the ability to do just that.
Perhaps the best way to illustrate this paradigm shift and how some companies have adapted to it is by looking at a very traditional manufacturer: Rolls-Royce. When you hear the word “Rolls-Royce,” what immediately comes to mind is a shiny handmade car, with a uniformed chauffeur sitting in the driver's seat and a perfectly tailored couple in the back on their way to Ascot or Wimbledon. Rolls-Royce, the quintessential stodgy British company, right? What if I told you, though, that Rolls-Royce doesn't even make cars anymore (that business was sold in 1972 and the brand was licensed to BMW in 1998), that 50 percent of its income comes from services, and that in 1990 all of its employees were in Great Britain and today 40 percent are based outside of the United Kingdom, integrated into a global operation that stretches from China to Singapore to India to Italy to Spain to Germany to Japan and up to Scandinavia?
No, this is not your father's Rolls-Royce.
“Quite a long time ago we said, 'We cannot be just a U.K. company,'” Sir John Rose, chief executive of Rolls- Royce PLC, told me in an interview while we were both visiting China. “The U.K. is a tiny market. In the late 1980s, 60 percent of our business was defense [particularly jet engines] and our primary customer was Her Majesty's government. But we needed to become a world player, and if we were going to do that we had to recognize that the biggest customer in everything we could do was the U.S., and we had to be successful in nondefense markets. So we became a technology company [specializing in] power systems.” Today Rolls-Royce's core competency is making gas turbines for civilian and military airplanes, for helicopters, for ships, and for the oil and gas and power- generation industries. Rolls-Royce has customers now in 120 countries and employs around thirty-five thousand people, but only twenty-one thousand are located in the United Kingdom, with the rest part of a global network of research, service, and manufacturing workers. Half of Rolls-Royce's revenue is now generated by businesses outside the United Kingdom. “In the U.K. we are thought of as a British company,” said Rose, “but in Germany we are a German company. In America we are an American company, in Singapore we are a Singaporean company-you have to be in order to be close to the customer but also to the suppliers, employees, and communities in which we operate.” Today Rolls-Royce employs people of about fifty nationalities in fifty countries speaking about fifty languages. It outsources and offshores about 75 percent of its components to its global supply chain. “The 25 percent that we make are the differentiating elements/' said Rose. ”These are the hot end of the engine, the turbines, the compressors and fans and the alloys, and the aerodynamics of how they are made. A turbine blade is grown from a single crystal in a vacuum furnace from a proprietary alloy, with a very complex cooling system. This very high-value-added manufacturing is one of our core competencies.“ In short, said Rose, ”We still own the key technologies, we own the ability to identify and define what product is required by our customers, we own the ability to integrate the latest science into making these products, we own the route to the market for these products, and we own the ability to collect and understand the data generated by those customers using our products, enabling us to support that product while in service and constantly add value.“
But outside of these core areas, Rolls-Royce has adopted a much more horizontal approach to outsourcing noncore components to suppliers anywhere in the world, and to seeking out IQ far beyond the British Isles. The sun may have set on the British Empire, and it used to set on the old Rolls-Royce. But it never sets on the new Rolls- Royce. To produce breakthroughs in the power-generation business today, the company has to meld together the insights of many more specialists from around the world, explained Rose. And to be able to commercialize the next energy frontier-fuel cell technology-will require that even more.
“One of the core competencies of the business today is partnering,” said Rose. “We partner on products and on service provisions, we partner with universities and with other participants in our industry. You have to be disciplined about what they can provide and what we can sensibly undertake... There is a market in R & D and a market in suppliers and a market in products, and you need to have a structure that responds to all of them.”
A decade ago, he added, “We did 98 percent of our research and technology in the U.K. and now we do less than 40 percent in the U.K. Now we do it as well in the U.S., Germany, India, Scandinavia, Japan, Singapore, Spain, and Italy. We now recruit from a much more international group of universities to anticipate the mix of skills and nationalities we will want in ten or fifteen years.”
When Rolls-Royce was a U.K.-centric company, he added, it was very vertically organized. “But we had to flatten ourselves,” said Rose, as more and more markets opened worldwide that Rolls-Royce could sell into and from which it could extract knowledge.
And what does the future hold?
This approach to change that Rolls-Royce has perfected in response to the flattening of the world is going to become the standard for more and more new start-up companies. If you were to approach venture capital firms in
