Misreading The T (as in Tech) Leaves

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Are there any more profound lessons to be learned by credit unions in a small observation related to bowling?

Very much so, according to one analyst, who believes fundamental forces affecting members and the credit unions that serve them are being overlooked and even misinterpreted.

Kjell Nordstrom, assistant professor at the Institute of International Business at the Stockholm School of Economics, held the attention of credit union executives attending CUES' CEO Network here for nearly an hour by reexamining those fundamental forces and many of the assumptions-often wrong assumptions, according to Nordstrom-held by credit union leaders.

First among those misconceptions, he said, is that the "household" data that is central to so much credit union analysis has lost its value.

To illustrate, he cited an observation made by Robert D. Putnam of Harvard Business School, who noticed that the number of people who go bowling in the U.S. is on the rise, yet the number of people who participate in organized bowling leagues has declined.

"The overall conclusion is that slowly but surely we are building societies where we do things alone," said Nordstrom. "This is being driven by technology that enables us to do things alone. This is a U.S.-based observation, but also applies to Europe, where we have large societies of singles. We've been trained in statistics to observe households. What's a household? The basic unit of analysis in our society is changing. It is not the household, it is not the family, it is the individual."

A second misconception, Nordstrom stated, is related to globalization. "When we talk of globalization, we think of the global brands and a world that is becoming more homogeneous. But globalization doesn't make the world more homogenous. Globalization makes the world more fragmented than ever. The differences between the states will increase. The difference between the United States and Europe will increase, not decrease. Why? Just take the case of Silicon Valley; 66% of the people in the valley are not from there, they are from elsewhere. It's a foreign legion. There are thousands of 'valleys' from around the world. The financial city of Europe is still London, but it's not London, it's just a few blocks. And it's a foreign legion there, too. One hour from those clusters you'll find a completely different life. The differences are increasing now."

The Anonymous Capitalists

A third trend deserving of attention, according to Nordstrom, is a phenomenon called "anonymous capitalists."

"This is the fact that private capitalists have never, ever played a smaller role than they do today," he said, referring to the disappearance of the Carnegies and Vanderbilts. "And you know who owns the corporations today, it is institutions, the mutual funds, the pension funds. This is an anonymous form of ownership that creates new problems. Why? Because it's becoming too dominant. All we know for sure about ownership in companies is that diversity is a good thing. Private ownership. Mutual ownership. A mix is what you want to have. Today there is a lack of ownership other than this anonymous form that also introduces governance problems; significant governance problems. Why? Because the bargaining power of management has grown exponentially. Why? Because the ownership is anonymous."

Nordstrom's fourth trend may surprise some, as he referred to it as the return of "Marxist powers."

"Karl Marx is back in the financial industry," said Nordstrom, who quoted Marx's statement, "The workers should own the critical production resources."

"That was the whole idea of the former Soviet Union. That idea was tested, and after 70 years most people agree it was a really bad idea," said Nordstrom. "But now let's look at the financial industry. What is it that we do today on a daily basis? We check our mail, go to conferences, attend a few meetings. It's called intellectual work. That's good news. Here comes the bad news. No one can own it apart from you. And people want a slice of the pie. And it's time now to pay for it. Ninety to 95% of what they do at HP is intellectual work. This introduces a number of problems for banks, for companies, for politicians. This is you and I as individuals coming back to the concept of bowling alone."

Nordstrom said the two principles at work in the market today both were developed by Charles Darwin. The first is the better known "Survival of the fittest." The second principle is less well known and stems from Darwin's puzzlement over what to do about the male peacock and its survival. It can't fly well, can't run fast, and certainly can't hide. Darwin finally concluded it had survived as the result of the "survival of the most attractive."

"This is the road less traveled in most industries because most of us trained in this survival of the fittest," said Nordstrom.

Credit unions must recognize that there is a new socioeconomic landscape, according to Nordstrom, who has dubbed this new landscape "kareoke capitalism." And every credit union is affected.

Karaoke Capitalism

"Karaoke capitalism is institutionalized imitation," said Nordstrom. "In business we call this best practices. We do this, and ROI at the industry level is driven down. Look at midsized cars; can you tell a difference? No manufacturer earns any money on midsized cars. They have all imitated each other. But in this landscape are principles we can expect to be around for years to come."

According to Nordstrom, there are four trends credit unions to which credit unions should pay attention:

"The No. 1 provider tends to take it all." And the differences between No. 1 and all the rest tend to increase.

"We drive out geography." We are trained to believe in geography; today geography does not matter. Today biography matters. The People's Republic of Christina Aguilera is more interesting from a financial perspective than France, a whole nation state. Why? France is somewhat homogenous. A more powerful question to ask someone rather than what they do for a living is, 'So, what are you consuming these days?" It no longer matters what they are producing. If you look at the structure of your industry today geography matters. Today, biography matters, because that tells us much more about the individual."

Nordstrom said there are different types of knowledge, the first being what he called "articulate knowledge."

"This is basically things I can say to you and you can apply them," said Nordstrom, who has a Ph.D. "College is articulate knowledge. Some of you won't like this. The value of this type of knowledge used to be extremely high. The value of a university degree is rapidly decreasing. Anything and everything that can be articulated or put on a piece of paper will be distributed to the rest of the world within days. This means there is no scarcity of knowledge. It means to hire someone from MIT or Harvard or Wharton means hiring a warm body that only brings you what is already known elsewhere."

The greater value, according to Nordstrom, can be found in what he called "tacit" or implicit knowledge. "It can't be written down. As human beings we know much more than we can say or put on a piece of paper. Credit risk is something you can smell. If you can put it on a piece of a paper it is immediately trivial. We believe that the fourth generation of competitive advantages will primarily be based on tacit knowledge."

Organizations or credit unions that frequently reorganize internally put themselves at a disadvantage, Nordstrom believes, because tacit knowledge can only be transferred over time. For the same reason, he suggested working from home is also a disadvantage.

Times have changed greatly from the time it took 400 years for the Roman Empire to decline, observed Nordstrom. Technology has compressed change and driven it faster. But technology itself offers no antidote, he said, adding, "Information technology is like restrooms. Necessary, but it doesn't provide any competitive advantage."

Credit union members, like all consumers, have more freedom than at any point in history, noted Nordstrom. "When people have a great deal of freedom, they are free to know. We are free to know, to go to do, to be. It puts a lot of pressure on us in our capacity as suppliers. Citizens use that freedom. And we haven't seen anything yet."

Nordstrom pointed out that China is equal to the size of one United States plus another United States plus another United States plus one Europe plus one Japan.

As some credit unions are discovering, membership is becoming fragmented as socieety becomes fragmented, according to Nordstrom, who said that trend will only continue.

"The world has become a transparent place," he said. "It's difficult to cover things up. We leave tracks everywhere; it's like electronic snow. What does it mean? It means that ethics are a good strategy."

The world is turning into a giant bazaar, Nordstrom believes, who said competing is no longer a matter of core competence but "core competents."

The Temporary Monopoly

"The fundamentals have changed over the past 30 to 40 years," he said. "Money you can earn. You start with an idea, the recipe. But that recipe must be very, very particular. It has to provide you with a temporary monopoly. This is what successful business is about. Microsoft is a temporary monopoly-it's a moment in time and space when you are perceived to be unique. This is the role of management-to defend the temporary monopoly."

Not long ago, he noted, "most of us had temporary monopolies that were based on a technology. That's over. It is no longer sufficient for success. It's not coming back. Why? Anything that can be distributed will be. Then come the golden years; we reorganize, we do some marketing, we do some CRM. This is the time of the schools and consultants. That was extremely powerful-when it was unique-the temporary monopoly. It was just-in-time management that made Japan rich. Now any of us can do it. Companies that have exploded in growth the last 15 to 20 years have come from nowhere. When I was a kid, Nokia made toilet paper and rubber boots."

For credit unions, said Nordstrom, "There are a lot of opportunities out there as I see it for locally connected organizations to exploit if you have an indepth knowledge that is not articulate. You collaborate on the articulate stuff, but leave the inarticulate stuff to the branches. The backoffice does all the trivial stuff you share. It is in the tacit stuff where you make the difference. And it is the stuff you don't share."

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