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Tuesday, November 22, 2005

Four Paragraphs on Edge Competences

The XBox 360 is an important move for Microsoft. But I'm not sure the buzz, recognizes why: because it lets MS begin to build edge competences.

Consider core competences. Core competences were expressd through core products - products that embodied the essence of the deep, inimitable, and valuable learning these competences were composed of. Think the Walkman in the 80s and 90s, or HP printers, or the iPod in the 00s.

Now, core competences - and core products - are getting devalued. Why? Simply, because both information and coordination are cheap. Manufacturers in China can easily obtain the information necessary to build core products, and can also now coordinate efficently enough to manage production.

This means firms should shift away from core competences to edge competences. Rather than fighting against cheap coordination, edge competences let firms leverage it. How? Core products fight cheap coordination. But edge platforms leverage cheap coordination, by letting prosumers and other parties external to the firm coordinate to build value for the firm.

Think AdWords and AdSense - it's a kind of judo on Google's part. Rather than fighting cheap coordination - by locking up distribution channels Media 1.0 style, or even using nasty tactics like popups and popunders, Media 1.5 style - they've leveraged it, creating a market where nearly anyone can buy and sell ads. This, in turn, has disrupted the core competences in ad selling Media 1.0 players have spent the better part of a century building. Contrast this with Yahoo's stuck-in-the-middle approach; developing competences neither at the core, nor at the edge. If MS can avoid errors like this - if MS recognizes it must shift intent from the core product to the edge platform - potentially, the 360 can bring a similar disruption to the games industry.

-- umair // 8:39 PM //


I like this idea of edge competencies, but I'm still trying to get my head round it.

Would you say that AdSense *is* an edge competency? Or merely that it supports other people at the edge building their competencies?
// Blogger phil jones // 12:57 AM

Finally- I understand edge competencies. Excellent post, Umair!
// Anonymous Pete Cashmore // 1:59 PM

AdWords are very plastic, and that's an edge competency.

I wonder what kind of video prosumers are creating. Even though you can buy an HD cam and editing software cheap, it's going to be hard leverage cheap coordinating and have liquidity.
// Blogger Bryan Menell // 6:12 PM


I just got this insight this morning: edge compentencies are about turning the organization inside out; all the goodies become exposed rather than hidden and guarded, and the value is created via shared networks rather than access fees. I still can't wait to see how Microsoft (and others) will handle the compensation for the prosumer's contribution.

From this perspective, yes, Adsense is more edge than other models, but still has hidden parts (Google analytics moves even more toward the edge).

We'll know we're in high gear when hardware, software and training are given away because of the value creation of those so outfitted.

- David Swedlow
// Blogger meme_pool // 6:29 PM


I think I see how the work is being done at the edge by AdSense, ie. people at the edge are selling advertising space to other people at the edge, and Google's genius is to enable that.

But you could still characterise Google themselves as an expert broker, who's core competence is matching relevent ads to relevant sites.

So is "edge competence", competence at *enabling* the edge, even if it is, itself, in the core?
// Blogger phil jones // 9:34 PM


Thanks for the comments. I'm glad you're getting some mileage of these concepts.


The problem is that you don't have a clear understanding of what a competence, whether edge or core, is.

A competence is not about technology enabling stuff. It is learning.

Core competences, as I've pointed out, are based on information. Edge competences are based on coordination.

Think about David's comment. Why is it profitable for firms to turn themselves, increasingly, inside-out?

Collecting cheap information and essentially building barriers around it used to be the dominant strategy (record labels, newspapers, etc). Now, the game has been inverted.
// Blogger umair // 9:53 PM

"The problem is that you don't have a clear understanding of what a competence, whether edge or core, is."

Well, I'm reading the word in its everyday usage as meaning something like "ability". Is this wrong?
// Blogger phil jones // 1:40 AM

I am not sure I agree with you totally about edge versus competency for manufacturing businesses. Coordination costs are decreasing but some industries will always require deep, path dependent, technological skill. And that isn't just complex manufacturing. Building an ERP computer system requires deep edge and core competencies. If you take edge competencies to the extreme you end up with some wierd Tom Peters idea of businesses as a series of project teams. That may work for professional services or services businesses in general but it certainly isn't a good strategy for all businesses.

Ultimately anyone can assemble a DVD player (or any other electrical good) with off the shelf components now, but the makers of those components require core competencies, on the marketing and assembly firms need edge competencies
// Anonymous jeremy // 9:29 AM


The point is that returns for the kinds of businesses you are talking about are dropping fast; that's exactly because cheap coordination vaporizes entry barriers.

Most businesses delivering superior returns are organized exactly as wierdo Tom Peters style ad hoc project teams.


Yes (everyday usage is inaccurate).
// Blogger umair // 9:36 AM

"Yes (everyday usage is inaccurate)."

Touche! But any chance of a link to a better definition ;-)
// Blogger phil jones // 3:29 PM

I think I finally understand where you're going with edge competencies.

I also totally disagree that that is what Microsoft is doing.

There's no need to overcomplicate this low-cost-core-product strategy with "edge competencies" or prosumer value-add - the price of the "core" product" is only low (and unprofitable) today because the profitability of upsell and cross-sell of core product users is so high. SIMPLE. The products up-sold and cross-sold to core product users aren't edge competencies - they are the new core - and the core is now more of a "channel" than a product.

Effectively, each ipod is a private music store. Ipod costs $200 because it holds $5,000 worth of songs - not because apple is interested in monetizing prosumers edge competencies.

It is simply the razor and the razor blade. It's the "lifetime value" of the customer - it has nothing to do with peer production.

I agree that understanding prosumers passions for their "edge competencies" IS what has resulted in the move to core products being those "accesories" that enable our passions - but not that the goal is to dervive value from those.

"Edge competencies" seems like its really just "specialization", the sister to "participation" in productive communities. Or am I missing something?

The extrapolation that valuabe "edge competencies" undermines "core" value also falls flat if you move beyond manufacturing. Apply your thinking to Professional Services and exactly the opposite is true - core competencies have incresed in profitability in services companies - try telling a law firm, management consultancy or hospital that they should look for profits in their edge competencies.
// Blogger David Gibbons // 8:08 PM

Hi David,

Let me begin by noting two things. First, far from extrapolating, this is based on deep research (check the ppts). Second, dude, relax.

Edge competences are not just about "prosumer value-add". They're not about what prosumers have - they're what firms (can) do: learn how to leverage cheap coordination.

Think about the XBox. You're thinking of the 360 itself. But the edge competence is the investment MS is making in helping a new value chain emerge for Live. This is a shift from leveraging cheap information to leveraging cheap coordination.

As for Apple, the reason they're *not* realizing scale economies from iTunes/iPod (as I've shown) is exactly *because* of what you call the "razor/blades" model. There's no edge competence- no leverage of cheap coordination - and hence no increasing returns to scale.

As for capital vs knowledge intensive industries, hospitals and lawyers are both beginning to develop edge competences - both industries are starting to use pseudo-market mechanisms to outsource higher and higher value bits of work.

And this points to where I think a lot of more tech-focused readers are missing the big picture - there are many ways cheap coordination is expressed; the prosumer economy is one. But, for example, Google's edge competences have little to do with prosumers. I urge you to think a little bigger.
// Blogger umair // 11:56 PM

Hi Umair,

Hey, I've read the ppts - front to back - my printed copy of The Atomizing Hand is frayed at this point - I convinced a community of 800 people to adopt microchunking as its operating model - I've learnt stax here, thanks. The relax part is funny, sorry if I didn't come across that way.

Disclaimer: I'm not a gamer and haven't followed the industry. But how does cheap co-ordination of content & participation in Live differ from a garage-band recording mp3's for sale to ipod owners? In the mp3 case, edge competences actually exist in far less of a walled garden than what Live seems to be - mp3s are relevant in a range of domains from itunes competitors to p2p file-sharing networks. Are podcasts not cheap coordination?

Agreed, there is more potential (today) to "leverage cheap coordination" of the resources of firms, than prosumers. That's why Amazon drop-ships the long tail. But interestingly, in their case, the strategy has proven less profitable than eBay's coordination of the edge competences of prosumers and small businesses. (Notably, both strategies have evolved towards each other).

So, knowledge process outsourcing = edge competencies? (What!=EC?:-) It's an interesting concept and one that industry would do well to consider. In practice, too many outsourcing contracts fail to leverage mutual strengths and instead incur unnecessary costs of mutual risk mitigation. Human Capital Assets as an edge competency are not oten considered either "re-usable" or abundant from the perspective of the salary payer.

I'm trying to think further - the new big is small :-)
// Blogger David Gibbons // 6:53 AM
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