415 China-United States Manhattan Project, a crash program.docx

415
China-United States Manhattan Project, a crash program to
jointly develop clean
alternative energies, bringing together China's best scientists
and its political
ability to implement pilot projects, with America's best brains,
technology, and
money. It would be the ideal model and the ideal project for
creating value
horizontally, with each side contributing its strength. Said Scott
Roberts, the
Cambridge Energy Research Associates analyst in China, "When
it comes to renewable
technology and sustainable energy, China could be the
laboratory of the world-not
just the workshop of the world." Why not?
::::: TWELVE
The Dell Theory of Conflict Prevention
Old-Time Versus Just-in-Time
Free Trade is God's diplomacy. There is no other certain way of

uniting people in
the bonds of peace. -British politician Richard Cobden, 1857
Before I share with you the subject of this chapter, I have to tell
you a little bit
about the computer that I wrote this book on. It's related to the
theme I am about
to discuss. This book was largely written on a Dell Inspiron
600m notebook, service
tag number 9ZRJP41. As part of the research for this book71
visited with the management
team at Dell near Austin, Texas. I shared with them the ideas in
this book and in
return I asked for one favor: I asked them to trace for me the
entire global supply
chain that produced my Dell notebook. Here is their report: My
computer was conceived
when I phoned Dell's 800 number on April 2, 2004, and was
connected to sales
representative Mujteba Naqvi, who immediately entered my
order into Dell's order
management system. He typed in both the type of notebook I
ordered as well as the
special features I wanted, along with my personal information,
shipping address,

billing address, and credit card information. My credit card was
verified by Dell
through its work flow connection with Visa, and my order was
then released to Dell's
production system. Dell has six factories around the world-in
Limerick, Ireland;
Xiamen, China; Eldorado do Sul, Brazil; Nashville, Tennesee;
Austin, Texas; and
Penang, Malaysia. My order went out by e-mail to the Dell
notebook factory in Malaysia,
where the parts for the computer were immediately ordered
from the supplier logistics
centers (SLCs) next to the Penang factory. Surrounding every
Dell factory in the world
are these supplier logistics centers, owned by the different
suppliers of Dell parts.
These SLCs are like staging areas. If you are a Dell supplier
anywhere in the world,
your job is to keep your SLC full of your specific parts so they
can constantly be
trucked over to the Dell factory for just-in-time manufacturing.
"In an average day, we sell 140,000 to 150,000 computers,"
explained Dick Hunter,

one of Dell's three global production managers. "Those orders
come in over Dell.com
or over the telephone. As soon these orders come in, our
suppliers know about it.
They get a signal based on every component in the machine you
ordered, so the supplier
knows just what he has to deliver. If you are supplying power
cords for desktops,
you can see minute by minute how many power cords you are
going to have to deliver."
Every two hours, the Dell factory in Penang sends an e-mail to
the various SLCs nearby,
416
telling each one what parts and what quantities of those parts it
wants delivered
within the next ninety minutes-and not one minute later. Within
ninety minutes, trucks
from the various SLCs around Penang pull up to the Dell
manufacturing plant and unload
the parts needed for all those notebooks ordered in the last two
hours. This goes
on all day, every two hours. As soon as those parts arrive at the
factory, it takes

thirty minutes for Dell employees to unload the parts, register
their bar codes, and
put them into the bins for assembly. "We know where every part
in every SLC is in
the Dell system at all times," said Hunter.
So where did the parts for my notebook come from? I asked
Hunter. To begin with, he
said, the notebook was codesigned in Austin, Texas, and in
Taiwan by a team of Dell
engineers and a team of Taiwanese notebook designers. "The
customer's needs, required
technologies, and Dell's design innovations were all determined
by Dell through our
direct relationship with customers," he explained. "The basic
design of the
motherboard and case-the basic functionality of your machine-
was designed to those
specifications by an ODM [original design manufacturer] in
Taiwan. We put our
engineers in their facilities and they come to Austin and we
actually codesign these
systems. This global teamwork
brings an added benefit-a globally distributed virtually twenty-

four-hour-per-day
development cycle. Our partners do the basic electronics and we
help them design
customer and reliability features that we know our customers
want. We know the
customers better than our suppliers and our competition,
because we are dealing
directly with them every day." Dell notebooks are completely
redesigned roughly every
twelve months, but new features are constantly added during the
year- through the
supply chain-as the hardware and software components advance.
It happened that when my notebook order hit the Dell factory in
Penang, one part was
not available-the wireless card-due to a quality control issue, so
the assembly of
the notebook was delayed for a few days. Then the truck full of
good wireless cards
arrived. On April 13, at 10:15 a.m., a Dell Malaysia worker
pulled the order slip
that automatically popped up once all my parts had arrived from
the SLCs to the Penang
factory. Another Dell Malaysia employee then took out a
"traveler"-a special carrying

tote designed to hold and protect parts-and started plucking all
the parts that went
into my notebook.
Where did those parts come from? Dell uses multiple suppliers
for most of the thirty
key components that go into its notebooks. That way if one
supplier breaks down or
cannot meet a surge in demand, Dell is not left in the lurch. So
here are the key
suppliers for my Inspiron 600m notebook: The Intel
microprocessor came from an Intel
factory either in the Philippines, Costa Rica, Malaysia, or
China. The memory came
from a Korean-owned factory in Korea (Samsung), a Taiwanese-
owned factory in Taiwan
(Nanya), a German-owned factory in Germany (Infineon), or a
Japanese-owned factory
in Japan (Elpida). My graphics card was shipped from either a
Taiwanese-owned factory
in China (MSI) or a Chinese-run factory in China (Foxconn).
The cooling fan came from
a Taiwanese-owned factory in Taiwan (CCI or Auras). The
motherboard came from either

a Korean-owned factory in Shanghai (Samsung), a Taiwanese-
owned factory in Shanghai
(Quanta), or a Taiwanese-owned factory in Taiwan (Compal or
Wistron). The keyboard
came from either a Japanese-owned company in Tianjin, China
(Alps), a Taiwanese-owned
factory in Shenzen, China (Sunrex), or a Taiwanese-
417
owned factory in Suzhou, China (Darfon). The LCD display was
made in either South
Korea (Samsung or LG.Philips LCD), Japan (Toshiba or Sharp),
or Taiwan (Chi Mei
Optoelectronics, Hannstar Display, or AU Optronics). The
wireless card came from
either an American-owned factory in China (Agere) or Malaysia
(Arrow), or a
Taiwanese-owned factory in Taiwan (Askey or Gemtek) or
China (USI). The modem was
made by either a Taiwanese-owned company in China (Asustek
or Liteon) or a Chinese-run
company in China (Foxconn). The battery came from an
American-owned factory in

Malaysia (Motorola), a Japanese-owned factory in Mexico or
Malaysia or China (Sanyo),
or a South Korean or Taiwanese factory in either of those two
countries (SDI or Simplo).
The hard disk drive was made by an American-owned factory in
Singapore (Seagate),
a Japanese-owned company in Thailand (Hitachi or Fujitsu), or
a Japanese-owned
factory in the Philippines (Toshiba). The CD/DVD drive came
from a South Korean-owned
company with factories in Indonesia and the Philippines
(Samsung); a Japanese-owned
factory in China or Malaysia (NEC); a Japanese-owned factory
in Indonesia, China,
or Malaysia (Teac); or a Japanese-owned factory in China
(Sony). The notebook carrying
bag was made by either an Irish-owned company in China
(Tenba) or an American-owned
company in China (Targus, Samsonite, or Pacific Design). The
power adapter was made
by either a Thai-owned factory in Thailand (Delta) or a
Taiwanese, Korean, or
American-owned factory in China (Liteon, Samsung, or
Mobility). The power cord was

made by a British-owned company with factories in China,
Malaysia, and India (Volex).
The removable memory stick was made by either an Israeli-
owned company in Israel
(M-System) or an American-owned company with a factory in
Malaysia (Smart Modular).
This supply chain symphony-from my order over the phone to
production to delivery
to my house-is one of the wonders of the flat world.
"We have to do a lot of collaborating," said Hunter. "Michael
[Dell] personally knows
the CEOs of these companies, and we are constantly working
with them on process
improvements and real-time demand/supply balancing." Demand
shaping goes on
constantly, said Hunter. What is "demand shaping"? It works
like this: At 10 a.m.
Austin time, Dell discovers that so many customers have
ordered notebooks with
40-gigabyte
418
hard drives since the morning that its supply chain will run
short in two hours. That

signal is automatically relayed to Dell's marketing department
and to Dell.com and
to all the Dell phone operators taking orders. If you happen to
call to place your
Dell order at 10:30 a.m., the Dell representative will say to you,
"Tom, it's your
lucky day! For the next hour we are offering 60-gigabyte hard
drives with the notebook
you want-for only $10 more than the 40-gig drive. And if you
act now, Dell will throw
in a carrying case along with your purchase, because we so
value you as a customer."
In an hour or two, using such promotions, Dell can reshape the
demand for any part
of any notebook or desktop to correspond with the projected
supply in its global supply
419
chain. Today memory might be on sale, tomorrow it might be
CD-ROMs.
Picking up the story of my notebook, on April 13, at 11:29 a.m.,
all the parts had
been plucked from the just-in-time inventory bins in Penang,
and the computer was

assembled there by A. Sathini, a team member "who manually
screwed together all of
the parts from kitting as well as the labels needed for Tom's
system," said Dell in
their production report to me. "The system was then sent down
the conveyor to go to
burn, where Tom's specified software was downloaded." Dell
has huge server banks
stocked with the latest in Microsoft, Norton Utilities, and other
popular software
applications, which are downloaded into each new computer
according to the specific
tastes of the customer.
"By 2:45 p.m., Tom's software had been successfully
downloaded, and [was] manually
moved to the boxing line. By 4:05 p.m., Tom's system [was]
placed in protective foam
and a shuttle box, with a label, which contains his order
number, tracking code, system
type, and shipping code. By 6:04 p.m., Tom's system had been
loaded on a pallet with
a specified manifest, which gives the Merge facility visibility to
when the system

will arrive, what pallet it will be on (out of 75+ pallets with 152
systems per pallet),
and to what address Tom's system will ship. By 6:26 p.m.,
Tom's system left [the Dell
factory] to head to the Penang, Malaysia, airport."
Six days a week Dell charters a China Airlines 747 out of
Taiwan and flies it from
Penang to Nashville via Taipei. Each 747 leaves with twenty-
five thousand Dell
notebooks that weigh altogether 110,000 kilograms,
or 50,000 pounds. It is the only 747 that ever lands in
Nashville, except Air Force
One, when the president visits. "By April 15, 2004, at 7:41 a.m.,
Tom's system arrived
at [Nashville] with other Dell systems from Penang and
Limerick. By 11:58 a.m., Tom's
system [was] inserted into a larger box, which went down the
boxing line to the
specific external parts that Tom had ordered."
That was thirteen days after I'd ordered it. Had there not been a
parts delay in
Malaysia when my order first arrived, the time between when I
phoned in my purchase,

when the notebook was assembled in Penang, and its arrival in
Nashville would have
been only four days. Hunter said the total supply chain for my
computer, including
suppliers of suppliers, involved about four hundred companies
in North America,
Europe, and primarily Asia, but with thirty key players.
Somehow, though, it all came
together. As Dell reported: On April 15, 2004, at 12:59 p.m.,
"Tom's system had been
shipped from [Nashville] and was tenured by UPS shipping LTL
(3-5-day ground,
specified by Tom), with UPS tracking number
1Z13WA374253514697. By April 19, 2004,
at 6:41 p.m., Tom's system arrived in Bethesda, MD, and was
signed for."
I am telling you the story of my notebook to tell a larger story
of geopolitics in
the flat world. To all the forces mentioned in the previous
chapter that are still
holding back the flattening of the world, or could actually
reverse the process, one
has to add a more traditional threat, and that is an outbreak of a
good, old-fashioned,

world-shaking, economy-destroying war. It could be China
deciding once and for all
to eliminate Taiwan as an independent state; or North Korea,
out of fear or insanity,
using one of its nuclear weapons against South Korea or Japan;
or Israel and a
soon-to-be-nuclear Iran going at each other; or India and
Pakistan finally nuking
it out. These and other classic geopolitical conflicts could erupt
at any time and
either slow the flattening of the world or seriously unflatten it.
The real subject of this chapter is how these classic geopolitical
threats might be
moderated or influenced by the new forms of collaboration
fostered and demanded by
the flat world-particularly supply-
420
chaining. The flattening of the world is too young for us to draw
any definitive
conclusions. What is certain, though, is that as the world
flattens, one of the most
interesting dramas to watch in international relations will be the

interplay between
the traditional global threats and the newly emergent global
supply chains. The
interaction between old-time threats (like China versus Taiwan)
and just-in-time
supply chains (like China plus Taiwan) will be a rich source of
study for the field
of international relations in the early twenty-first century.
In The Lexus and the Olive Tree I argued that to the extent that
countries tied their
economies and futures to global integration and trade, it would
act as a restraint
on going to war with their neighbors. I first started thinking
about this in the late
1990s, when, during my travels, I noticed that no two countries
that both had
McDonald's had ever fought a war against each other since each
got its McDonald's.
(Border skirmishes and civil wars don't count, because
McDonald's usually served both
sides.) After confirming this with McDonald's, I offered what I
called the Golden
Arches Theory of Conflict Prevention. The Golden Arches
Theory stipulated that when

a country reached the level of economic development where it
had a middle class big
enough to support a network of McDonald's, it became a
McDonald's country. And people
in McDonald's countries didn't like to fight wars anymore. They
preferred to wait
in line for burgers. While this was offered slightly tongue in
cheek, the serious
point I was trying to make was that as countries got woven into
the fabric of global
trade and rising living standards, which having a network of
McDonald's franchises
had come to symbolize, the cost of war for victor and
vanquished became prohibitively
high.
This McDonald's theory has held up pretty well, but now that
almost every country
has acquired a McDonald's, except the worst rogues like North
Korea, Iran, and Iraq
under Saddam Hussein, it seemed to me that this theory needed
updating for the flat
world. In that spirit, and again with tongue slightly in cheek, I
offer the Dell Theory

of Conflict Prevention, the essence of which is that the advent
and spread of
just-in-time global supply chains in the flat world are an even
greater restraint
on geopolitical adventurism than the more general rising
standard of living that
McDonald's symbolized.
421
The Dell Theory stipulates: No two countries that are both part
of a major global
supply chain, like Dell's, will ever fight a war against each
other as long as they
are both part of the same global supply chain. Because people
embedded in major global
supply chains don't want to fight old-time wars anymore. They
want to make
just-in-time deliveries of goods
422
and services -and enjoy the rising standards of living that come
with that. One of
the people with the best feel for the logic behind this theory is
Michael Dell, the

founder and chairman of Dell.
"These countries understand the risk premium that they have,"
said Dell of the
countries in his Asian supply chain. "They are pretty careful to
protect the equity
that they have built up or tell us why we should not worry
[about their doing anything
adventurous]. My belief after visiting China is that the change
that has occurred
there is in the best interest of the world and China. Once people
get a taste for
whatever you want to call it-economic independence, a better
lifestyle, and a better
life for their child or children-they grab on to that and don't
want to give it up."
Any sort of war or prolonged political upheaval in East Asia or
China "would have
a massive chilling effect on the investment there and on all the
progress that has
been made there," said Dell, who added that he believes the
governments in that part
of the world understand this very clearly. "We certainly make
clear to them that

stability is important to us. [Right now] it is not a day-to-day
worry for us ...
I believe that as time and progress go on there, the chance for a
really disruptive
event goes down exponentially. I don't think our industry gets
enough credit for the
good we are doing in these areas. If you are making money and
being productive and
raising your standard of living, you're not sitting around
thinking, Who did this
to us? or Why is our life so bad?"
There is a lot of truth to this. Countries whose workers and
industries are woven
into a major global supply chain know that they cannot take an
hour, a week, or a
month off for war without disrupting industries and economies
around the world and
thereby risking the loss of their place in that supply chain for a
long time, which
could be extremely costly. For a country with no natural
resources, being part of
a global supply chain is like striking oil-oil that never runs out.
And therefore,
getting dropped from such a chain because you start a war is

like having your oil
wells go
dry or having someone pour cement down them. They will not
come back anytime soon.
"You are going to pay for it really dearly," said Glenn E.
Neland, senior vice
president for worldwide procurement at Dell, when I asked him
what would happen to
a major supply-chain member in Asia that decided to start
fighting with its neighbor
and disrupt the supply chain. "It will not only bring you to your
knees [today], but
you will pay for a long time-because you just won't have any
credibility if you
demonstrate you are going to go [off] the political deep end.
And China is just now
starting to develop a level of credibility in the business
community that it is
creating a business environment you can prosper in-with
transparent and consistent
rules." Neland said that suppliers regularly ask him whether he
is worried about China
and Taiwan, which have threatened to go to war at several
points in the past half

century, but his standard response is that he cannot imagine
them "doing anything
more than flexing muscles with each other." Neland said he can
tell in his
conversations and dealings with companies and governments in
the Dell supply chain,
particularly the Chinese, that "they recognize the opportunity
and are really hungry
423
to participate in the same things they have seen other countries
in Asia do. They
know there is a big economic pot at the end of the rainbow and
they are really after
it. We will spend about $35 billion producing parts this year,
and 30 percent of that
is [in] China."
If you follow the evolution of supply chains, added Neland, you
see the prosperity
and stability they promoted first in Japan, and then in Korea and
Taiwan, and now
in Malaysia, Singapore, the Philippines, Thailand, and
Indonesia. Once countries get

embedded in these global supply chains, "they feel part of
something much bigger than
their own businesses," he said. Osamu Watanabe, the CEO of
the Japan External Trade
Organization (JETRO), was explaining to me one afternoon in
Tokyo how Japanese
companies were moving vast amounts of low- and middle-range
technical work and
manufacturing to China, doing the basic fabrication there, and
then bringing it back
to Japan for final assembly. Japan was doing this despite a
bitter legacy of mistrust
between the two countries, which was intensified by the
Japanese invasion of China
in the last century. Historically, he noted, a strong Japan and a
strong
China have had a hard time coexisting. But not today, at least
not for the moment.
Why not? I asked. The reason you can have a strong Japan and a
strong China at the
same time, he said, "is because of the supply chain." It is a win-
win for both.
Obviously, since Iraq, Syria, south Lebanon, North Korea,
Pakistan, Afghanistan, and

Iran are not part of any major global supply chains, all of them
remain hot spots
that could explode at any time and slow or reverse the flattening
of the world. As
my own notebook story attests, the most important test case of
the Dell Theory of
Conflict Prevention is the situation between China and Taiwan-
since both are deeply
embedded in several of the world's most important computer,
consumer electronics,
and, increasingly, software supply chains. The vast majority of
computer components
for every major company comes from coastal China, Taiwan,
and East Asia. In addition,
Taiwan alone has more than $100 billion in investments in
mainland China today, and
Taiwanese experts run many of the cutting-edge Chinese high-
tech manufacturing
companies.
It is no wonder that Craig Addison, the former editor of
Electronic Business Asia
magazine, wrote an essay for the International Herald Tribune
(September 29, 2000),

headlined "A 'Silicon Shield' Protects Taiwan from China." He
argued that
"Silicon-based products, such as computers and networking
systems, form the basis
of the digital economies in the United States, Japan and other
developed nations.
In the past decade, Taiwan has become the third-largest
information technology
hardware producer after the United States and Japan. Military
aggression by China
against Taiwan would cut off a large portion of the world's
supply of these
products . . . Such a development would wipe trillions of dollars
off the market value
of technology companies listed in the United States, Japan and
Europe." Even if
China's leaders, like former president Jiang Zemin, who was
once minister of
electronics, lose sight of how integrated China and Taiwan are
in the world's computer
supply chain, they need only ask their kids for an update. Jiang
Zemin's son, Jiang
Mianheng, wrote Addison, "is a partner in a wafer fabrication
project in Shanghai

with Winston Wang of Taiwan's Grace T.H.W. Group." And it is
not just Taiwanese.
Hundreds of big American tech companies now have R & D
operations in China; a war
that disrupted them could
424
lead not only to the companies moving their plants elsewhere
but also to a significant
loss of R & D investment in China, which the Beijing
government has been betting on
to advance its development. Such a war could also, depending
on how it started, trigger
a widespread American boycott of Chinese goods-if China were
to snuff out the
Taiwanese democracy-which would lead to serious economic
turmoil inside China.
The Dell Theory had its first real test in December 2004, when
Taiwan held
parliamentary elections. President Chen Shui-bian's pro-
independence Democratic
Progressive Party was expected to win the legislative runoff
over the main opposition

Nationalist Party, which favored closer ties with Beijing. Chen
framed the election
as a popular referendum on his proposal to write a new
constitution that would formally
enshrine Taiwan's independence, ending the purposely
ambiguous status quo. Had Chen
won and moved ahead on his agenda to make Taiwan its own
motherland, as opposed to
maintaining the status quo fiction that it is a province of the
mainland, it could
have led to a Chinese military assault on Taiwan. Everyone in
the region was holding
his or her breath. And what happened? Motherboards won over
motherland. A majority
of Taiwanese voted against the pro-independence governing
party legislative
candidates, ensuring that the DPP would not have a majority in
parliament. I believe
the message Taiwanese voters were sending was not that they
never want Taiwan to be
independent. It was that they do not want to upset the status quo
right now, which
has been so beneficial to so many Taiwanese. The voters
seemed to understand clearly

how interwoven they had become with the mainland, and they
wisely opted to maintain
their de facto independence rather than force de jure
independence, which might have
triggered a Chinese invasion and a very uncertain future.
Warning: What I said when I put forth the McDonald's theory, I
would repeat even more
strenuously with the Dell Theory: It does not make wars
obsolete. And it does not
guarantee that governments will not engage in wars of choice,
even governments that
are part of major supply chains. To suggest so would be naive.
It guarantees only
that governments whose countries are enmeshed in global
supply chains will have
425
to think three times, not just twice, about engaging in anything
but a war of
self-defense. And if they choose to go to war anyway, the price
they will pay will
be ten times higher than it was a decade ago and probably ten
times higher than whatever
the leaders of that country think. It is one thing to lose your
McDonald's. It's quite

another to fight a war that costs you your place in a twenty-
first-century supply
chain that may not come back around for a long time.
While the biggest test case of the Dell Theory is China versus
Taiwan, the fact is
that the Dell Theory has already proved itself to some degree in
the case of India
and Pakistan, the context in which I first started to think about
it. I happened to
be in India in 2002, when its just-in-time services supply chains
ran into some very
old-time geopolitics-and the supply chain won. In the case of
India and Pakistan,
426
the Dell Theory was working on only one party-India-but it still
had a major impact.
India is to the world's knowledge and service supply chain what
China and Taiwan are
to the manufacturing ones. By now readers of this book know
all the highlights: General
Electric's biggest research center outside the United States is in
Bangalore, with

seventeen hundred Indian engineers, designers, and scientists.
The brain chips for
many brand-name cell phones are designed in Bangalore.
Renting a car from Avis online?
It's managed in Bangalore. Tracing your lost luggage on Delta
or British Airways is
done from Bangalore, and the backroom accounting and
computer maintenance for scores
of global firms are done from Bangalore, Mumbai, Chennai, and
other major Indian
cities. Here's what happened: On May 31, 2002, State
Department spokesman Richard
Boucher issued a travel advisory saying, "We urge American
citizens currently in India
to depart the country," because the prospect of a nuclear
exchange with Pakistan was
becoming very real. Both nations were massing troops on their
borders, intelligence
reports were suggesting that they both might be dusting off their
nuclear warheads,
and CNN was flashing images of people flooding out of India.
The global American firms
that had moved their back rooms and R & D operations to
Bangalore were deeply unnerved.

"I was actually surfing on the Web, and I saw a travel advisory
come up on India on
a Friday evening/' said Vivek Paul, president of Wipro, which
manages backroom
operations from India of many American multinationals. "As
soon as I saw that, I said,
'Oh my gosh, every customer that we have is going to have a
million questions on this.'
It was the Friday before a long weekend, so over the weekend
we at Wipro developed
a fail-safe business continuity plan for all of our customers."
While Wipro's
customers were pleased to see how on top of things the
company was, many of them were
nevertheless rattled. This was not in the plan when they decided
to outsource
mission-critical research and operations to India. Said Paul, "I
had a CIO from one
of our big American clients send me an e-mail saying, 1 am now
spending a lot of time
looking for alternative sources to India. I don't think you want
me doing that, and
I don't want to be doing it.' I immediately forwarded his
message to the Indian

ambassador in Washington and told him to get it to the right
person." Paul would not
tell me what company it was, but I have confirmed through
diplomatic sources that
it was United Technologies. And plenty of others, like
American Express and General
Electric, with back rooms in Bangalore, had to have been
equally worried.
For many global companies, "the main heart of their business is
now supported here,"
said N. Krishnakumar, president of MindTree, another leading
Indian knowledge
outsourcing firm based in Bangalore. "It can cause chaos if
there is a disruption."
While not trying to meddle in foreign affairs, he added, "What
we explained to our
government, through the Confederation of Indian Industry, is
that providing a stable,
predictable operating environment is now the key to India's
development." This was
a real education for India's elderly leaders in New Delhi, who
had not fully absorbed
how critical India had become to the world's knowledge supply
chain. When you are

managing vital backroom operations for American Express or
General Electric or Avis,
or are responsible for tracing all the lost luggage on British
Airways or Delta, you
cannot take a month, a week, or even a day off for war without
causing major disruptions
for those companies. Once those companies have made a
commitment to outsource business
operations or research to India, they expect it to stay there. That
is a major
commitment. And if geopolitics
427
causes a serious disruption, they will leave, and they will not
come back very easily.
When you lose this kind of service trade, you can lose it for
good.
"What ends up happening in the flat world you described,"
explained Paul, "is that
you have only one opportunity to make it right if something
[goes] wrong. Because
the disadvantage of being in a flat world is that despite all the
nice engagements

and stuff and the exit barriers that you have, every customer has
multiple options,
and so the sense of responsibility you have is not just out of a
desire to do good
by your customers, but also a desire for self-preservation."
The Indian government got the message. Was India's central
place in the world's
services supply chain the only factor in getting Prime Minister
Vajpayee to tone down
his rhetoric and step back from the brink? Of course not. There
were other factors,
to be sure-most notably the deterrent effect of Pakistan's own
nuclear arsenal. But
clearly, India's role in global services was an important
additional source of
restraint on its behavior, and it was taken into account by New
Delhi. "I think it
sobered a lot of people," said Jerry Rao, who, as noted earlier,
heads the Indian
high-tech trade association. "We engaged very seriously, and we
tried to make the
point that this was very bad for Indian business. It was very bad
for the Indian

economy . . . [Many people] didn't realize till then how
suddenly we had become
integrated into the rest of the world. We are now partners in a
twenty-four by seven
by three-sixty-five supply chain."
Vivek Kulkami, then information technology secretary for
Bangalore's regional
government, told me back in 2002, "We don't get involved in
politics, but we did bring
to the government's attention the problems the Indian IT
industry might face if there
were a war." And this was an altogether new factor for New
Delhi to take into
consideration. "Ten years ago, [a lobby of IT ministers from
different Indian states]
never existed," said Kulkarni. Now it is one of the most
important business lobbies
in India and a coalition that no Indian government can ignore.
"With all due respect, the McDonald's [shutting] down doesn't
hurt anything," said
Vivek Paul, "but if Wipro had to shut down we would af-
428
feet the day-to-day operations of many, many companies." No

one would answer the
phones in call centers. Many e-commerce sites that are
supported from Bangalore would
shut down. Many major companies that rely on India to
maintain their key computer
applications or handle their human resources departments or
billings would seize up.
And these companies did not want to find alternatives, said
Paul. Switching is very
difficult, because taking over mission-critical day-to-day
backroom operations of
a global company takes a great deal of training and experience.
It's not like opening
a fast-food restaurant. That was why, said Paul, Wipro's clients
were telling him,
"'I have made an investment in you. I need you to be very
responsible with the trust
I have reposed in you.' And I think that created an enormous
amount of back pressure
429
on us that said we have to act in a responsible fashion ... All of
a sudden it became

even clearer that there's more to gain by economic gains than by
geopolitical gains.
[We had more to gain from building] a vibrant, richer middle
class able to create
an export industry than we possibly could by having an ego-
satisfying war with
Pakistan." The Indian government also looked around and
realized that the vast
majority of India's billion people were saying, "I want a better
future, not more
territory." Over and over again, when I asked young Indians
working at call centers
how they felt about Kashmir or a war with Pakistan, they waved
me off with the same
answer: "We have better things to do." And they do. America
needs to keep this in
mind as it weighs its overall approach to outsourcing. I would
never advocate shipping
some American's job overseas just so it will keep Indians and
Pakistanis at peace
with each other. But I would say that to the extent that this
process happens, driven
by its own internal economic logic, it will have a net positive
geopolitical effect.

It will absolutely make the world safer for American kids.
Each of the Indian business leaders I interviewed noted that in
the event of some
outrageous act of terrorism or aggression from Pakistan, India
would do whatever it
takes to defend itself, and they would be the first to support
that-the Dell Theory
be damned. Sometimes war is unavoidable. It is imposed on you
by the reckless behavior
of others, and you have to just pay the price. But the more India
and, one hopes,
soon Pakistan get enmeshed in global service supply chains, the
greater disin-
centive they have to fight anything but a border skirmish or a
war of words.
The example of the 2002 India-Pakistan nuclear crisis at least
gives us some hope.
That cease-fire was brought to us not by General Powell but by
General Electric.
We bring good things to life.
Infosys Versus al-Qaeda
Unfortunately, even GE can do only so much. Because, alas, a
new source for

geopolitical instability has emerged only in recent years, for
which even the updated
Dell Theory can provide no restraint. It is the emergence of
mutant global supply
chains -that is, nonstate actors, be they criminals or terrorists,
who learn to use
all the elements of the flat world to advance a highly
destabilizing, even nihilistic
agenda. I first started thinking about this when Nandan
Nilekani, the Infosys CEO,
was giving me that tour I referred to in Chapter 1 of his
company's global
videoconferencing center at its Bangalore headquarters. As
Nandan explained to me
how Infosys could get its global supply chain together at once
for a virtual conference
in that room, a thought popped into my head: Who else uses
open-sourcing and
supply-chaining so imaginatively? The answer, of course, is al-
Qaeda.
Al-Qaeda has learned to use many of the same instruments for
global collaboration
that Infosys uses, but instead of producing products and profits
with them, it has

produced mayhem and murder. This is a particularly difficult
problem. In fact, it
may be the most vexing geopolitical problem for flat-world
countries that want to
focus on the future. The flat world-unfortunately-is a friend of
both Infosys and
al-Qaeda. The Dell Theory will not work at all against these
informal Islamo-Leninist
terror networks, because they are not a state with a population
that will hold its
leaders accountable or with a domestic business lobby that
might restrain them. These
mutant global supply chains are formed for the purpose of
destruction, not profit.
They don't need investors, only recruits,
430
donors, and victims. Yet these mobile, self-financing mutant
supply chains use all
the tools of collaboration offered by the flat world-open-
sourcing to raise money,
to recruit followers, and to stimulate and disseminate ideas;
outsourcing to train

recruits; and supply-chaining to distribute the tools and the
suicide bombers to
undertake operations. The U.S. Central Command has a name
for this whole underground
network: the Virtual Caliphate. And its leaders and innovators
understand the flat
world almost as well as Wal-Mart, Dell, and Infosys do.
In the previous chapter, I tried to explain that you cannot
understand the rise of
al-Qaeda emotionally and politically without reference to the
flattening of the world.
What I am arguing here is that you cannot understand the rise of
al-Qaeda technically
without reference to the flattening of the world, either.
Globalization in general
has been al-Qaeda's friend in that it has helped to solidify a
revival of Muslim
identity and solidarity, with Muslims in one country much
better able to see and
sympathize with the struggles of their brethren in another
country-thanks to the
Internet and satellite television. At the same time, as pointed
out in the previous
chapter, this flattening process has intensified the feelings of

humiliation in some
quarters of the Muslim world over the fact that civilizations to
which the Muslim
world once felt superior-Hindus, Jews, Christians, Chinese - are
now all doing better
than many Muslim countries, and everyone can see it. The
flattening of the world has
also led to more urbanization and large-scale immigration to the
West of many of these
young, unemployed, frustrated Arab-Muslim males, while
simultaneously making it much
easier for informal open-source networks of these young men to
form, operate, and
interconnect. This certainly has been a boon for underground
extremist Muslim
political groups. There has been a proliferation of these
informal mutual supply
chains throughout the Arab-Muslim world today-small networks
of people who move money
through hawalas (hand-to-hand financing networks), who recruit
through alternative
education systems like the madrassas, and who communicate
through the Internet and
other tools of the global information revolution. Think about it:

A century ago,
anarchists were limited in their ability to communicate and
collaborate with one
another, to find sympathizers, and to band together for an
431
operation. Today, with the Internet, that is not a problem. Today
even the Unabomber
could find friends to join a consortium where his "strengths"
could be magnified and
reinforced by others who had just as warped a worldview as he
did.
What we have witnessed in Iraq is an even more perverse
mutation of this mutant supply
chain-the suicide supply chain. Since the start of the U.S.
invasion in March 2002,
more than two hundred suicide bombers have been recruited
from within Iraq and from
across the Muslim world, brought to the Iraqi front by some
underground railroad,
connected with the bomb makers there, and then dispatched
against U.S. and Iraqi
targets according to whatever suits the daily tactical needs of
the insurgent Islamist

432
forces in Iraq. I can understand, but not accept, the notion that
more than
thirty-seven years of Israeli occupation of the West Bank might
have driven some
Palestinians into a suicidal rage. But the American occupation
of Iraq was only a
few months old before it started to get hit by this suicide supply
chain. How do you
recruit so many young men "off the shelf" who are ready to
commit suicide in the cause
of jihad, many of them apparently not even Iraqis? And they
don't even identify
themselves by name or want to get credit-at least in this world.
The fact is that
Western intelligence agencies have no clue how this
underground suicide supply chain,
which seems to have an infinite pool of recruits to draw on,
works, and yet it has
basically stymied the U.S. armed forces in Iraq. From what we
do know, though, this
Virtual Caliphate works just like the supply chains I described
earlier. Just as you

take an item off the shelf in a discount store in Birmingham and
another one is
immediately made in Beijing, so the retailers of suicide deploy
a human bomber in
Baghdad and another one is immediately recruited and
indoctrinated in Beirut. To the
extent that this tactic spreads, it will require a major rethinking
of U.S. military
doctrine.
The flat world has also been such a huge boon for al-Qaeda and
its ilk because of
the way it enables the small to act big, and the way it enables
small acts-the killing
of just a few people-to have big effects. The horrific video of
the beheading of Wall
Street Journal reporter Danny Pearl by Islamist militants in
Pakistan was transmitted
by the Internet all over the world. There is not a journalist
anywhere who saw or
even just read
about that who was not terrified. But those same beheading
videos are also used as
tools of recruitment. The flat world makes it much easier for

terrorists to transmit
their terror. With the Internet they don't even have to go
through Western or Arab
news organizations but can broadcast right into your computer.
It takes much less
dynamite to transmit so much more anxiety. Just as the U.S.
Army had embedded
journalists, so the suicide supply chain has embedded terrorists,
in their own way,
to tell us their side of the story. How many times have I gotten
up in the morning,
fired up the Internet, and been confronted by the video image of
some masked gunman
threatening to behead an American-all brought to me courtesy
of AOL's home page? The
Internet is an enormously useful tool for the dissemination of
propaganda, conspiracy
theories, and plain old untruths, because it combines a huge
reach with a patina of
technology that makes anything on the Internet somehow more
believable. How many times
have you heard someone say, "But I read it on the Internet," as
if that should end
the argument? In fact, the Internet can make things worse. It

often leads to more
people being exposed to crazy conspiracy theories.
"The new system of diffusion-the Internet-is more likely to
transmit irrationality
than rationality," said political theorist Yaron Ezrahi, who
specializes in the
interaction between media and politics. "Because irrationality is
more emotionally
loaded, it requires less knowledge, it explains more to more
people, it goes down
easier." That is why conspiracy theories are so rife in the Arab-
Muslim world
today-and unfortunately are becoming so in many quarters of
the Western world, for
that matter. Conspiracy theories are like a drug that goes right
into your bloodstream,
enabling you to see "the Light." And the Internet is the needle.
Young people used
to have to take LSD to escape. Now they just go online. Now
you don't shoot up, you
download. You download the precise point of view that speaks
to all your own biases.

And the flat world makes it all so much easier.
Gabriel Weimann, a professor of communication at Haifa
University, Israel, did an
incisive study of terrorists' use of the Internet and of what I call
the flat world,
which was published in March 2004 by the United States
Institute of Peace and excerpted
on YaleGlobal Online on April 26, 2004. He made the following
points:
433
While the danger that cyber-terrorism poses to the Internet is
frequently debated,
surprisingly little is known about the threat posed by terrorists'
use of the Internet.
A recent six-year-long study shows that terrorist organizations
and their supporters
have been using all of the tools that the Internet offers to recruit
supporters, raise
funds, and launch a worldwide campaign of fear. It is also clear
that to combat
terrorism effectively, mere suppression of their Internet tools is
not enough. Our
scan of the Internet in 2003-04 revealed the existence of
hundreds of websites serving

terrorists in different, albeit sometimes overlapping, ways. . .
There are countless
examples of how [terrorists] use this uncensored medium to
spread disinformation,
to deliver threats intended to instill fear and helplessness, and
to disseminate
horrific images of recent actions. Since September 11, 2001, al-
Qaeda has festooned
its websites with a string of announcements of an impending
"large attack" on US
targets. These warnings have received considerable media
coverage, which has helped
to generate a widespread sense of dread and insecurity among
audiences throughout
the world and especially within the United States . . .
The Internet has significantly expanded the opportunities for
terrorists to secure
publicity. Until the advent of the Internet, terrorists' hopes of
winning publicity
for their causes and activities depended on attracting the
attention of television,
radio, or the print media. The fact that terrorists themselves
have direct control

over the content of their websites offers further opportunities to
shape how they
are perceived by different target audiences and to manipulate
their image and the
images of their enemies. Most terrorist sites do not celebrate
their violent
activities. Instead- regardless of their nature, motives, or
location-most terrorist
sites emphasize two issues: the restrictions placed on freedom
of expression; and
the plight of their comrades who are now political prisoners.
These issues resonate
powerfully with their own supporters and are also calculated to
elicit sympathy from
Western audiences that cherish freedom of expression and frown
on measures to silence
political opposition . . .
434
Terrorists have proven not only skillful at online marketing but
also adept at mining
the data offered by the billion-some pages of the World Wide
Web. They can learn from
the Internet about the schedules and locations of targets such as
transportation

facilities, nuclear power plants, public buildings, airports and
ports, and even
counterterrorism measures. According to Secretary of Defense
Donald Rumsfeld, an
435
al-Qaeda training manual recovered in Afghanistan tells its
readers, "Using public
sources openly and without resorting to illegal means, it is
possible to gather at
least 80 percent of all information required about the enemy."
One captured al-Qaeda
computer contained engineering and structural architecture
features of a dam, which
had been downloaded from the Internet and which would enable
al-Qaeda engineers and
planners to simulate catastrophic failures. In other captured
computers, U.S.
investigators found evidence that al-Qaeda operators spent time
on sites that offer
software and programming instructions for the digital switches
that run power, water,
transportation, and communications grids.

Like many other political organizations, terrorist groups use the
Internet to raise
funds. Al-Qaeda, for instance, has always depended heavily on
donations, and its
global fundraising network is built upon a foundation of
charities, nongovernmental
organizations, and other financial institutions that use websites
and Internet-based
chat rooms and forums. The fighters in the Russian breakaway
republic of Chechnya
have likewise used the Internet to publicize the numbers of bank
accounts to which
sympathizers can contribute. And in December 2001, the U.S.
government seized the
assets of a Texas-based charity because of its ties to Hamas.
In addition to soliciting financial aid online, terrorists recruit
converts by using
the full panoply of website technologies (audio, digital video,
etc.) to enhance the
presentation of their message. And like commercial sites that
track visitors to
develop consumer profiles, terrorist organizations capture
information about the

users who browse their websites. Visitors who seem most inter-
ested in the organization's cause or well suited to carrying out
its work are then
contacted. Recruiters may also use more interactive Internet
technology to roam
online chat rooms and cyber cafes, looking for receptive
members of the public,
particularly young people. The SITE Institute, a Washington,
D.C.-based terrorism
research group that monitors al-Qaeda's Internet
communications, has provided
chilling details of a high-tech recruitment drive launched in
2003 to recruit fighters
to travel to Iraq and attack U.S. and coalition forces there. The
Internet also grants
terrorists a cheap and efficient means of networking. Many
terrorist groups, among
them Hamas and al-Qaeda, have undergone a transformation
from strictly hierarchical
organizations with designated leaders to affiliations of semi-
independent cells that
have no single commanding hierarchy. Through the Internet,
these loosely
interconnected groups are able to maintain contact with one

another-and with members
of other terrorist groups. The Internet connects not only
members of the same
terrorist organizations but also members of different groups. For
instance, dozens
of sites supporting terrorism in the name of jihad permit
terrorists in places as
far-removed from one another as Chechnya and Malaysia to
exchange ideas and practical
information about how to build bombs, establish terror cells,
and carry out
attacks . . . Al-Qaeda operatives relied heavily on the Internet in
planning and
coordinating the September 11 attacks.
For all of these reasons we are just at the beginning of
understanding the geopolitical
impact of the flattening of the world. On the one hand, failed
states and failed
regions are places we have every incentive to avoid today. They
offer no economic
opportunity and there is no Soviet Union out there competing
with us for influence

over such countries. On the other hand, there may be nothing
more dangerous today
than a failed state with broadband capability. That is, even
failed states tend to
have telecommunications systems and satellite links, and
therefore if a terrorist
group infiltrates a failed state, as al-Qaeda did with
Afghanistan, it can amplify
its power enormously. As much as big powers want to stay away
456
from such states, they may feel compelled to get even more
deeply embroiled in them.
Think of America in Afghanistan and Iraq, Russia in Chechnya,
Australia in East Timor.
In the flat world it is much more difficult to hide, but much
easier to get connected.
"Think of Mao at the beginning of the Chinese communist
revolution," remarked Michael
Mandelbaum, the Johns Hopkins foreign policy specialist. "The
Chinese Communists had
to hide in caves in northwest China, but they could move around
in whatever territory
they were able to control. Bin Laden, by contrast, can't show his
face, but he can

reach every household in the world, thanks to the Internet." Bin
Laden cannot capture
any territory but he can capture the imagination of millions of
people. And he has,
broadcasting right into American living rooms on the eve of the
2004 presidential
election.
Hell hath no fury like a terrorist with a satellite dish and an
interactive Web site.
Too Personally Insecure
In the fall of 2004,1 was invited to speak at a synagogue in
Woodstock, New York,
home of the famous Woodstock music festival. I asked my hosts
how was it that they
were able to get a synagogue in Woodstock, of all places, big
enough to support a
lecture series. Very simple, they said. Since 9/11, Jews, and
others, have been moving
from New York City to places like Woodstock, to get away from
what they fear will
be the next ground zero. Right now this trend is a trickle, but it
would become a
torrent if a nuclear device were detonated in any European or

American city.
Since this threat is the mother of all unflatteners, this book
would not be complete
without a discussion of it. We can live with a lot. We lived
through 9/11. But we
cannot live with nuclear terrorism. That would un-flatten the
world permanently.
The only reason that Osama bin Laden did not use a nuclear
device on 9/11 was not
that he did not have the intention but that he did not
437
have the capability. And since the Dell Theory offers no hope of
restraining the
suicide supply chains, the only strategy we have is to limit their
worst capabilities.
That means a much more serious global effort to stanch nuclear
proliferation by
limiting the supply-to buy up the fissile material that is already
out there,
particularly in the former Soviet Union, and prevent more states
from going nuclear.
Harvard University international affairs expert Graham Allison,
in his book Nuclear

Terrorism: The Ultimate Preventable Catastrophe, outlines just
such a strategy for
denying terrorists access to nuclear weapons and nuclear
materials. It can be done,
he insists. It is a challenge to our will and convictions, but not
to our capabilities.
Allison proposes a new American-led international security
order to deal with this
438
problem based on what he calls "a doctrine of the Three No's:
No loose nukes, No new
nascent nukes, and No new nuclear states." No loose nukes, says
Allison, means locking
down all nuclear weapons and all nuclear material from which
bombs could be made-in
a much more serious way than we have done up till now. "We
don't lose gold from Fort
Knox," says Allison. "Russia doesn't lose treasures from the
Kremlin armory. So we
both know how to prevent theft of those things that are super
valuable to us if we
are determined to do it." No new nascent nukes means
recognizing that there is a group

of actors out there who can and do produce highly enriched
uranium or plutonium, which
is nothing more than nuclear bombs just about to hatch. We
need a much more credible,
multilateral nonprolif-eration regime that soaks up this fissile
material. Finally,
no new nuclear states means "drawing a line under the current
eight nuclear powers
and determining that, however unfair and unreasonable it may
be, that club will have
no more members than those eight," says Allison, adding that
these three steps might
then buy us time to develop a more formal, sustainable,
internationally approved
regime.
It would be nice also to be able to deny the Internet to al-Qaeda
and its ilk, but
that, alas, is impossible-without undermining ourselves. That is
why limiting their
capabilities is necessary but not sufficient. We also have to find
a way to get at
their worst intentions. If we are not going to shut down the
Internet and all the

other creative and collaborative tools that have flattened the
world, and if we can't
restrict access to them,
the only thing we can do is try to influence the imagination and
intentions that people
bring to them and draw from them. When I raised this issue, and
the broad themes of
this book, with my religious teacher, Rabbi Tzvi Marx from
Holland, he surprised me
by saying that the flat world I was describing reminded him of
the story of the Tower
of Babel.
How so? I asked. "The reason God banished all the people from
the Tower of Babel and
made them all speak different languages was not because he did
not want them to
collaborate per se," answered Rabbi Marx. "It was because he
was enraged at what they
were collaborating on-an effort to build a tower to the heavens
so they could become
God." This was a distortion of the human capacity, so God
broke their union and their
ability to communicate with one another. Now, all these years
later, humankind has

again created a new platform for more people from more places
to communicate and
collaborate with less friction and more ease than ever: the
Internet. Would God see
the Internet as heresy?
"Absolutely not," said Marx. "The heresy is not that mankind
works together-it is
to what ends. It is essential that we use this new ability to
communicate and
collaborate for the right ends-for constructive human aims and
not megalomaniacal
ends. Building a tower was megalo-maniacal. Bin Laden's
insistence that he has the
truth and can flatten anyone else's tower who doesn't heed him
is megalomaniacal.
Collaborating so mankind can achieve its full potential is God's
hope."
How we promote more of that kind of collaboration is what the
final chapter is all
about.
::::: Conclusion: Imagination

::::: THIRTEEN
11/9 Versus 9/11
Imagination is more important than knowledge.
-Albert Einstein
On the Internet, nobody knows you're a dog.
-Two dogs talking to each other, in a New Yorker cartoon by
Peter Steiner, July 5,
1993
Reflecting on this past decade and a half, during which the
world went flat, it strikes
me that our lives have been powerfully shaped by two dates:
11/9 and 9/11. These two
dates represent the two competing forms of imagination at work
in the world today:
the creative imagination of 11/9 and the destructive imagination
of 9/11. One brought
down a wall and opened the windows of the world-both the
operating system and the
kind we look through. It unlocked half the planet and made the
citizens there our
potential partners and competitors. Another brought down the
World Trade Center,

closing its Windows on the World restaurant forever and putting
up new invisible and
concrete walls among people at a time when we thought 11 The
dismantling of the Berlin
Wall on 11/9 was brought about by people who dared to imagine
a different, more open
world-one where every human being would be free to realize his
or her full potential
- and who then summoned the courage to act on that
imagination. Do
442
you remember how it happened? It was so simple, really: In July
1989, hundreds of
East Germans sought refuge at the West German embassy in
Hungary. In September 1989,
Hungary decided to remove its border restrictions with Austria.
That meant that any
East German who got into Hungary could pass through to
Austria and the free world.
Sure enough, more than thirteen thousand East Germans escaped
through Hungary's back
door. Pressure built up on the East German government. When
in November it announced
plans to ease travel restrictions, tens of thousands of East

Germans converged on
the Berlin Wall, where, on 11/9/89, border guards just opened
the gates.
Someone there in Hungary, maybe it was the prime minister,
maybe it was just a
bureaucrat, must have said to himself or herself, "Imagine-
imagine what might happen
if we opened the border with Austria." Imagine if the Soviet
Union were frozen in
place. Imagine-imagine if East German citizens, young and old,
men and women, were
so emboldened by seeing their neighbors flee to the West that
one day they just swarmed
that Berlin Wall and started to tear it down? Some people must
have had a conversation
just like that, and because they did, millions of Eastern
Europeans were able to walk
out from behind the Iron Curtain and engage with a flattening
world. It was a great
era in which to be an American. We were the only superpower,
and the world was our
oyster. There were no walls. Young Americans could think
about traveling, for a
semester or a summer, to more countries than any American

generation before them.
Indeed, they could travel as far as their imagination and wallets
could take them.
They could also look around at their classmates and see people
from more different
countries and cultures than any other class before them.
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2 HARVARD BUSINESS REVIEW NOVEMBER–
DECEMBER 2017
Apr 2019 to May 2019.
BY MICHAEL E. PORTER AND JAMES E. HEPPELMANN
There is a fundamental disconnect
between the wealth of digital data
available to us and the physical world in

which we apply it. While reality is three-
dimensional, the rich data we now have to
inform our decisions and actions remains
trapped on two-dimensional pages and
screens. This gulf between the real and
digital worlds limits our ability to take
advantage of the torrent of information
and insights produced by billions of smart,
connected products (SCPs) worldwide.
NOVEMBER–DECEMBER 2017 HARVARD BUSINESS
REVIEW 3
Apr 2019 to May 2019.
put navigation, collision warning, and
other information directly in drivers’ line
of sight are now available in dozens of car
models. Wearable AR devices for factory
workers that superimpose production-
assembly or service instructions are being
piloted at thousands of companies. AR is
supplementing or replacing traditional
manuals and training methods at an
ever-faster pace.
More broadly, AR enables a new
information-delivery paradigm, which
we believe will have a profound impact
on how data is structured, managed,
and delivered on the internet. Though
the web transformed how information
is collected, transmitted, and accessed,

its model for data storage and delivery—
pages on flat screens—has major limits: It
requires people to mentally translate 2-D
information for use in a 3-D world. That
isn’t always easy, as anyone who has used
a manual to fix an office copier knows. By
superimposing digital information directly
on real objects or environments, AR allows
people to process the physical and digital
simultaneously, eliminating the need to
mentally bridge the two. That improves
our ability to rapidly and accurately absorb
information, make decisions, and execute
required tasks quickly and efficiently.
AR displays in cars are a vivid illustration
of this. Until recently, drivers using GPS
navigation had to look at a map on a flat
screen and then figure out how to apply it in
the real world. To take the correct exit from a
busy rotary, for example, the driver needed
to shift his or her gaze between the road
and the screen and mentally connect the
image on the map to the proper turnoff. AR
heads-up displays lay navigational images
directly over what the driver sees through
the windshield. This reduces the mental
effort of applying the information, prevents
distraction, and minimizes driver error,
freeing people to focus on the road. (For
more on this, see the sidebar “Enhancing
Human Decision Making.”)
AR is making advances in consumer
markets, but its emerging impact on human
performance is even greater in industrial

settings. Consider how Newport News
Shipbuilding, which designs and builds
U.S. Navy aircraft carriers, uses AR near
the end of its manufacturing process to
inspect a ship, marking for removal steel
construction structures that are not part of
the finished carrier. Historically, engineers
Augmented reality, a set of technologies
that superimposes digital data and
images on the physical world, promises
to close this gap and release untapped
and uniquely human capabilities.
Though still in its infancy, AR is poised to
enter the mainstream; according to one
estimate, spending on AR technology
will hit $60 billion in 2020. AR will
affect companies in every industry and
many other types of organizations, from
universities to social enterprises. In the
coming months and years, it will transform
how we learn, make decisions, and interact
with the physical world. It will also change
how enterprises serve customers, train
employees, design and create products, and
manage their value chains, and, ultimately,
how they compete.
In this article we describe what AR is,
its evolving technology and applications,
and why it is so important. Its significance
will grow exponentially as SCPs proliferate,
because it amplifies their power to create
value and reshape competition. AR
will become the new interface between
humans and machines, bridging the digital

and physical worlds. While challenges
in deploying it remain, pioneering
organizations, such as Amazon, Facebook,
General Electric, Mayo Clinic, and the
U.S. Navy, are already implementing AR
and seeing a major impact on quality and
productivity. Here we provide a road map
for how companies should deploy AR and
explain the critical choices they will face in
integrating it into strategy and operations.
WHAT IS AUGMENTED REALITY?
Isolated applications of AR have been
around for decades, but only recently
have the technologies required to unleash
its potential become available. At the
core, AR transforms volumes of data and
analytics into images or animations that
are overlaid on the real world. Today most
AR applications are delivered through
mobile devices, but increasingly delivery
will shift to hands-free wearables such as
head-mounted displays or smart glasses.
Though many people are familiar with
simple AR entertainment applications,
such as Snapchat filters and the game
Pokémon Go, AR is being applied in far
more consequential ways in both consumer
and business-to-business settings. For
example, AR “heads-up” displays that
IN BRIEF
THE PROBLEM
While the physical world is
three-dimensional, most

data is trapped on 2-D
screens and pages. This gulf
between the real and digital
worlds limits our ability to
make the best use of the
volumes of information
available to us.
THE SOLUTION
Augmented reality
solves this problem by
superimposing digital
images and data on
real objects. By putting
information directly into the
context in which we’ll apply
it, AR speeds our ability to
absorb and act on it.
THE OUTCOME
Pioneering organizations,
including GE, Mayo Clinic,
and the U.S. Navy, are using
AR to improve productivity,
quality, and training. By
combining the strengths of
humans and machines, AR
will dramatically increase
value creation. CO
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SPOTLIGHT WHY EVERY ORGANIZATION NEEDS AN
AUGMENTED REALITY STRATEGY
Apr 2019 to May 2019.
had to constantly compare the actual ship
with complex 2-D blueprints. But with
AR, they can now see the final design
superimposed on the ship, which reduces
inspection time by 96%—from 36 hours to
just 90 minutes. Overall, time savings of
25% or more are typical for manufacturing
tasks using AR.
AR’S KEY CAPABILITIES
As we’ve previously explained (see
“How Smart, Connected Products Are
Transforming Competition,” HBR,
November 2014), the SCPs spreading
through our homes, workplaces, and
factories allow users to monitor product
operations and conditions in real time,
control and customize product operations
remotely, and optimize product
performance using real-time data. And in
some cases, intelligence and connectivity
allow SCPs to be fully autonomous.

AR powerfully magnifies the value
created by those capabilities. Specifically,
it improves how users visualize and
therefore access all the new monitoring
data, how they receive and follow
instructions and guidance on product
operations, and even how they interact
with and control the products themselves.
Visualize. AR applications provide a sort
of X-ray vision, revealing internal features
that would be difficult to see otherwise. At
the medical device company AccuVein, for
instance, AR technology converts the heat
signature of a patient’s veins into an image
that is superimposed on the skin, making
the veins easier for clinicians to locate. This
dramatically improves the success rate of
blood draws and other vascular procedures.
AR more than triples the likelihood of a
successful needle stick on the first try and
reduces the need for “escalations” (calling
for assistance, for example) by 45%.
Bosch Rexroth, a global provider
of power units and controls used in
manufacturing, uses an AR-enhanced
visualization to demonstrate the design and
capabilities of its smart, connected CytroPac
hydraulic power unit. The AR application
allows customers to see 3-D representations
of the unit’s internal pump and cooling
options in multiple configurations and how
subsystems fit together.

Instruct and guide. AR is already
redefining instruction, training, and
coaching. These critical functions, which
ENHANCING HUMAN DECISION MAKING
At its core, the power of augmented reality grows out of the
way
humans process information. We access information through
each of
our five senses—but at different rates. Vision provides us with
the most
information by far: An estimated 80% to 90% of the information
humans
get is accessed through vision.
The ability to absorb and process information is limited by our
mental capacity. The
demand on this capacity is referred to as “cognitive load.” Each
mental task we undertake
reduces the capacity available for other, simultaneous tasks.
Cognitive load depends on the mental effort required to process
a given type of
information. For example, reading instructions from a computer
screen and acting on them
creates a greater cognitive load than hearing those same
instructions, because the letters
must be translated into words and the words interpreted.
Cognitive load also depends
on “cognitive distance,” or the gap between the form in which
information is presented
and the context in which it is applied. Consider what happens
when someone refers to a
smartphone for directions while driving. The driver must
consume the information from
the screen, retain that information in working memory, translate

the directions into the
physical environment in front of him, and then act on those
directions, all while operating
the vehicle. There is significant cognitive distance between the
digital information on the
screen and the physical context in which information is applied.
Dealing with this distance
creates cognitive load.
The combination of the speed at which information is
transmitted and absorbed
and the cognitive distance involved in applying it lies at the
root of the much-repeated
phrase “A picture is worth a thousand words.” When we look at
the physical world, we
absorb a huge amount and variety of information almost
instantaneously. By the same
token, an image or picture that superimposes information on the
physical world, placing
it in context for us, reduces cognitive distance and minimizes
cognitive load.
This explains why AR is so powerful. There is no better
graphical user interface than the
physical world we see around us when it is enhanced by a
digital overlay of relevant data
and guidance where and when they are needed. AR eliminates
dependence on out-of-
context and hard-to-process 2-D information on pages and
screens while greatly improving
our ability to understand and apply information in the real
world.
warehouse picking. Complicated 2-D
schematic representations of a procedure in
a manual, for example, become interactive

3-D holograms that walk the user through
the necessary processes. Little is left to the
imagination or interpretation.
At Boeing, AR training has had a dramatic
impact on the productivity and quality of
complex aircraft manufacturing procedures.
In one Boeing study, AR was used to guide
trainees through the 50 steps required to
assemble an aircraft wing section involving
30 parts. With the help of AR, trainees
completed the work in 35% less time than
trainees using traditional 2-D drawings and
documentation. And the number of trainees
with little or no experience who could
perform the operation correctly the first
time increased by 90%.
improve workforce productivity, are
inherently costly and labor-intensive
and often deliver uneven results. Written
instructions for assembly tasks, for
instance, are frequently hard and time-
consuming to follow. Standard instructional
videos aren’t interactive and can’t adapt
to individual learning needs. In-person
training is expensive and requires students
and teachers to meet at a common
site, sometimes repeatedly. And if the
equipment about which students are being
taught isn’t available, they may need extra
training to transfer what they’ve learned to
a real-world context.
AR addresses those issues by providing
real-time, on-site, step-by-step visual

guidance on tasks such as product
assembly, machine operation, and
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AR-enabled devices can also transmit
what an on-site user is seeing to a remote
expert, who can respond with immediate
guidance. In effect, this instantly puts
the expert at the user’s side, regardless of
location. This capability not only improves
worker performance but substantially
reduces costs—as Lee Company, which
sells and services building systems, has
discovered. It uses AR to help its field
technicians with installations and repairs.
A remote expert can see what the tech
is viewing through his or her AR device,
guide the tech through the work to be done,
and even annotate the tech’s view with
instructions. Getting expert support from
a central location in real time has increased
Lee’s tech utilization dramatically. And,
by reducing the number of repeat visits,
Lee saves more than $500 per technician
per month in labor and travel costs. The

company calculates a return of $20 on every
dollar invested in AR.
Interact. Traditionally, people have
used physical controls such as buttons,
knobs, and, more recently, built-in touch-
screens to interact with products. With the
rise of SCPs, apps on mobile devices have
increasingly replaced physical controls and
allowed users to operate products remotely.
AR takes the user interface to a whole
new level. A virtual control panel can be
buttons on a smart light switch the user
can place anywhere that’s convenient.
The technologies underpinning these
capabilities are still emerging, but the
accuracy of voice commands in noisy
environments is improving, and advances
in gesture and gaze tracking have been
rapid. GE has already tested the use
of voice commands in AR experiences that
enable factory workers to perform complex
wiring processes in wind turbines—and
has achieved a 34% increase in productivity.
COMBINING AR AND VIRTUAL REALITY
AR’s well-known cousin, virtual reality, is
a complementary but distinct technology.
While AR superimposes digital information
on the physical world, VR replaces
physical reality with a computer-generated
environment. Though VR is used mostly
for entertainment applications, it can also

replicate physical settings for training
purposes. It is especially useful when the
settings involved are hazardous or remote.
Or, if the machinery required for training is
not available, VR can immerse technicians
in a virtual environment using holograms
of the equipment. So when needed,
VR adds a fourth capability—simulate—
to AR’s core capabilities of visualize,
instruct, and interact.
superimposed directly on the product
and operated using an AR headset,
hand gestures, and voice commands.
Soon, users wearing smart glasses will
be able to simply gaze at or point to a
product to activate a virtual user
interface and operate it. A worker
wearing smart glasses, for instance,
will be able to walk a line of factory
machines, see their performance
parameters, and adjust each machine
without physically touching it.
The interact capability of AR is still
nascent in commercial products but is
revolutionary. Reality Editor, an AR app
developed by the Fluid Interfaces group
at MIT’s Media Lab, provides a glimpse of
how it is rapidly evolving. Reality Editor
makes it easy to add an interactive AR
experience to any SCP. With it, people can
point a smartphone or a tablet at an SCP
(or, eventually, look at it through smart
glasses), “see” its digital interfaces and the
capabilities that can be programmed, and

link those capabilities to hand gestures
or voice commands or even to another
smart product. For example, Reality Editor
can allow a user to see a smart light bulb’s
controls for color and intensity and
set up voice commands like “bright” and
“mood” to activate them. Or different
settings of the bulb can be linked to
CONVERGING PHYSICAL AND DIGITAL
Augmented reality reduces the mental effort needed to connect
digital information
about the physical world with the context it applies to.
Mentally transposing GPS images onto the road ahead
is demanding and prone to errors.
AR superimposes digital data directly on the real world.
SEPARATED PHYSICAL AND DIGITAL WORLDS
CONVERGED VIEW
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Apr 2019 to May 2019.
VISUALIZE
AR can reveal features or systems
that would be difficult to see with
the naked eye. Here, it exposes the
internal components of a hydraulic
power unit and provides data on
their status.
EXPERIENCE AUGMENTED REALITY
Launch this interactive demo to see
AR’s key capabilities in action.
INSTRUCT AND GUIDE
AR can replace hard-to-understand
2-D instructions, such as those
for a repair process in a manual,
with interactive 3-D holograms that
walk the user through each step.
This AR shows how to replace a
power-unit filter.
INTERACT
AR can replace physical controls—
such as buttons, knobs, and built-in
touchscreens—with virtual ones
that are visually superimposed on
the target. You can operate a power

unit that drives a robotic arm in this
AR experience.
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AR will be far more widely applied
in business than VR will. But in some
circumstances, combining AR and VR
will allow users to transcend distance
(by simulating faraway locations),
transcend time (by reproducing
historical contexts or simulating possible
future situations), and transcend
scale (by allowing users to engage
with environments that are either too
small or too big to experience directly).
What’s more, bringing people together
in shared virtual environments can

enhance comprehension, teamwork,
communication, and decision making.
Ford, for example, is using VR to create
a virtual workshop where geographically
dispersed engineers can collaborate in real
time on holograms of vehicle prototypes.
Participants can walk around and go inside
these life-size 3-D holograms, working
out how to refine design details such as
the position of the steering wheel, the
angle of the dashboard, and the location of
instruments and controls without having
to build an expensive physical prototype
and get everyone to one location to
examine it.
The U.S. Department of Homeland
Security is going a step further by
combining AR instructions with VR
simulations to train personnel in
responding to emergency situations
such as explosions. This reduces costs
and—in cases in which training in
real environments would be dangerous—
risk. The energy multinational BP overlays
AR training procedures on VR simulations
that replicate specific drilling conditions,
like temperature, pressure, topography,
and ocean currents, and that instruct
teams on operations and help them
practice coordinated emergency responses
to disasters without high costs or risk.
HOW AR CREATES VALUE

AR creates business value in two
broad ways: first, by becoming part
of products themselves, and second,
by improving performance across the
value chain—in product development,
manufacturing, marketing, service,
and numerous other areas.
AR as a product feature. The
capabilities of AR play into the growing
design focus on creating better user
interfaces and ergonomics. The way
products convey important operational and
safety information to users has increasingly
become a point of differentiation (consider
how mobile apps have supplemented or
replaced embedded screens in products
like Sonos audio players). AR is poised to
rapidly improve such interfaces.
Dedicated AR heads-up displays, which
have only recently been incorporated into
VISUALIZE
An AR showroom
demo developed by
Microsoft and Volvo
provides an X-ray
view of a car’s engine
and undercarriage.
DECEMBER 2017

Apr 2019 to May 2019.
automobiles, have been a key feature in elite
military products, such as fighter jets, for
years and have been adopted in commercial
aircraft as well. These types of displays
are too expensive and bulky to integrate
into most products, but wearables such as
smart glasses are a breakthrough interface
with wide-ranging implications for all
manufacturers. With smart glasses,
a user can see an AR display on any product
enabled to communicate with them.
If you view a kitchen oven through
smart glasses, for example, you might see
a virtual display that shows the baking
temperature, the minutes remaining on the
timer, and the recipe you are following. If
you approach your car, an AR display might
show you that it is locked, that the fuel tank
is nearly full, and that the left-rear tire’s
pressure is low.
Because an AR user interface is purely
software based and delivered via the cloud,
it can be personalized and can continually
evolve. The incremental cost of providing
such an interface is low, and manufacturers
also stand to save considerable amounts
when traditional buttons, switches,

and dials are removed. Every product
manufacturer needs to carefully consider
the disruptive impact that this next-
generation interface may have on its
offering and competitive positioning.
AR and the value chain. The effects
of AR can already be seen across the value
chain, but they are more advanced in some
areas than in others. In general, visualize
and instruct/guide applications are now
having the greatest impact on companies’
operations, while the interact capability is
still emerging and in pilot testing.
Product development. Though
engineers have been using computer-
aided design (CAD) capabilities to create
3-D models for 30 years, they have been
limited to interacting with those models
through 2-D windows on their computer
screens, which makes it harder for them to
fully conceptualize designs. AR allows 3-D
models to be superimposed on the physical
world as holograms, enhancing engineers’
ability to evaluate and improve designs.
For example, a life-size 3-D hologram of a
construction machine can be positioned
on the ground, and engineers can walk
around it, peer under and over it, and even
go inside it to fully appreciate the sight lines
and ergonomics of its design at full scale in
its intended setting.
AR also lets engineers superimpose
CAD models on physical prototypes to

compare how well they match. Volkswagen
is using this technique—which makes
any difference between the latest design
and the prototype visually obvious—to
check alignment in digital design reviews.
This improves the accuracy of the quality
assurance process, in which engineers
previously had to painstakingly compare
2-D drawings with prototypes, and makes
it five to 10 times faster.
We expect that in the near future AR-
enabled devices such as phones and smart
glasses, with their embedded cameras,
accelerometers, GPS, and other sensors,
will increasingly inform product design
by exposing when, where, and how users
actually interact with the product—how
often a certain repair sequence is initiated,
for example. In this way the AR interface
will become an important source of data.
Manufacturing. In manufacturing,
processes are often complex, requiring
hundreds or even thousands of steps, and
mistakes are costly. As we’ve learned, AR
can deliver just the right information the
moment it’s needed to factory workers on
assembly lines, reducing errors, enhancing
efficiency, and improving productivity.
In factories, AR can also capture
information from automation and control
systems, secondary sensors, and asset
management systems and make visible
important monitoring and diagnostic

data about each machine or process.
Seeing information such as efficiency
and defect rates in context helps
maintenance technicians understand
problems and prompts factory workers
to do proactive maintenance that may
prevent costly downtime.
Iconics, which specializes in automation
software for factories and buildings, has
begun to integrate AR into its products’
user interfaces. By attaching relevant
information to the physical location where
it will be best observed and understood,
the AR interfaces enable more-efficient
monitoring of machines and processes.
Logistics. Warehouse operations are
estimated to account for about 20% of all
logistics costs, while picking items from
shelves represents up to 65% of warehouse
costs. In most warehouses, workers still
perform this task by consulting a paper list
of things to collect and then searching for
them. This method is slow and error-prone.
The logistics giant DHL and a growing
number of other companies are using AR
to enhance the efficiency and accuracy of
the picking process. AR instructions direct
workers to the location of each product to be
pulled and then suggest the best route to the
next product. At DHL this approach has led
to fewer errors, more-engaged workers, and
productivity gains of 25%. The company is
now rolling out AR-guided picking globally

and testing how AR can enhance other types
of warehouse operations, such as optimizing
the position of goods and machines in
layouts. Intel is also using AR in warehouses
and has achieved a 29% reduction in picking
time, with error rates falling to near zero.
And the AR application is allowing new Intel
workers to immediately achieve picking
speeds 15% faster than those of workers
who’ve had only traditional training.
Marketing and sales. AR is redefining
the concept of showrooms and product
demonstrations and transforming the
customer experience. When customers
can see virtually how products will
look or function in a real setting before
buying them, they have more-accurate
expectations, more confidence about their
purchase decisions, and greater product
satisfaction. Down the road, AR may even
reduce the need for brick-and-mortar stores
and showrooms altogether.
When products can be configured with
different features and options—which can
make them difficult and costly to stock—AR
is a particularly valuable marketing tool.
The construction products company AZEK,
for instance, uses AR to show contractors
and consumers how its decking and
paver products look in various colors and
arrangements. Customers can also see the
simulations in context: If you look at a house
through a phone or a tablet, the AR app can
add a deck onto it. The experience reduces

any uncertainty customers might feel about
their choices and shortens the sales cycle.
In e-commerce, AR applications are
allowing online shoppers to download
holograms of products. Wayfair and IKEA
both offer libraries with thousands of 3-D
product images and apps that integrate
them into a view of an actual room, enabling
customers to see how furniture and decor
will look in their homes. IKEA also uses its
app to collect important data about product
preferences in different regions.
After-sales service. This is a function
where AR shows huge potential to unlock
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the value-creating capabilities of SCPs. AR
assists technicians serving customers in the
field in much the same way it helps workers
in factories: by showing predictive analytics
data generated by the product, visually
guiding them through repairs in real time,
and connecting them with remote experts

who can help optimize procedures. For
example, an AR dashboard might reveal to
a field technician that a specific machine
part will most likely fail within a month,
allowing the tech to preempt a problem for
the customer by replacing it now.
At KPN, a European telecommunications
service provider, field engineers conducting
remote or on-site repairs use AR smart
glasses to see a product’s service-history
data, diagnostics, and location-based
information dashboards. These AR displays
help them make better decisions about
how to resolve issues, producing an 11%
reduction in overall costs for service teams,
a 17% decrease in work-error rates, and
higher repair quality.
Xerox used AR to connect field
engineers with experts instead of providing
service manuals and telephone support.
First-time fix rates increased by 67%, and
the engineers’ efficiency jumped by 20%.
Meanwhile, the average time it took to
resolve problems dropped by two hours,
so staffing needs fell. Now Xerox is using
AR to connect remote technical experts
directly with customers. This has increased
by 76% the rate at which technical
problems are resolved by customers
without any on-site help, cutting travel
costs for Xerox and minimizing downtime
for customers. Perhaps not surprisingly,
Xerox has seen its customer satisfaction

rates rise to 95%.
Human resources. Early AR adopters
like DHL, the U.S. Navy, and Boeing have
already discovered the power of delivering
step-by-step visual worker training on
Here are the essential questions
companies face:
1. What is the range of AR
opportunities in the industry, and in
what sequence should they be pursued?
Companies must weigh AR’s potential
impact on customers, product capabilities,
and the value chain.
2. How will AR reinforce a company’s
product differentiation? AR opens
up multiple differentiation paths. It can
create companion experiences that
expand the capabilities of products,
give customers more information, and
increase product loyalty. AR interfaces that
enhance products’ functionality or ease
of use can be big differentiators, as can
those that substantially improve product
support, service, and uptime. And AR’s
capacity to provide new kinds of feedback
on how customers use products can help
companies uncover further opportunities
for product differentiation.
The right differentiation path will
depend on a company’s existing strategy;
what competitors are doing; and the pace of

technology advances, especially in hardware.
3. Where will AR have the greatest
impact on cost reduction? AR enables new
efficiencies that every firm must explore.
As we’ve noted, it can significantly lower the
cost of training, service, assembly, design,
and other parts of the value chain. It can also
substantially cut manufacturing costs by
reducing the need for physical interfaces.
Each company will need to prioritize
AR-driven cost-reduction efforts in a
way that’s consistent with its strategic
positioning. Firms with sophisticated
products will need to capitalize on AR’s
superior and low-cost interface, while
many commodity producers will focus on
operational efficiencies across the value
chain. In consumer industries and retail,
marketing-related visualize applications
are the most likely starting point. In
manufacturing, instruct applications are
achieving the most immediate payoff by
addressing inefficiencies in engineering,
production, and service. And AR’s interact
capability, though still emerging, will
be important across all industries with
products that have customization and
complex control capabilities.
4. Should the company make AR
design and deployment a core strength,
or will outsourcing or partnering be
sufficient? Many firms are scrambling

demand through AR. AR allows instruction
to be tailored to a particular worker’s
experience or to reflect the prevalence of
particular errors. For example, if someone
repeatedly makes the same kind of mistake,
he can be required to use AR support
until his work quality improves. At some
companies, AR has reduced the training
time for new employees in certain kinds of
work to nearly zero and lowered the skill
requirements for new hires.
This is especially advantageous for the
package delivery company DHL, which
faces surges in demand during peak
seasons and is heavily dependent on the
effective hiring and training of temporary
workers. By providing real-time training
and hands-on guidance on navigating
warehouses and properly packing
and sorting materials, AR has reduced
DHL’s need for traditional instructors
and increased the onboarding speed for
new employees.
AR AND STRATEGY
AR will have a widespread impact on how
companies compete. As we’ve explained in
our previous HBR articles, SCPs are changing
the structure of almost all industries as well
as the nature of competition within them—
often expanding industry boundaries in
the process. SCPs give rise to new strategic
choices for manufacturers, ranging from
what functionality to pursue and how to

manage data rights and security, to whether
to expand a company’s scope of products
and compete in smart systems.
The increasing penetration of AR,
along with its power as the human interface
with SCP technologies, raises some new
strategic questions. While the answers
will reflect each company’s business and
unique circumstances, AR will become more
and more integral to every firm’s strategy.
AR DRAMATICALLY REDUCES
ERRORS AND INCREASES
PRODUCTIVITY IN FACTORIES.
DECEMBER 2017
Apr 2019 to May 2019.
services companies is an open question for
many. Some companies have no choice but
to treat AR talent as a strategic asset and
invest in acquiring and developing it, given
AR’s potentially large impact on competition
in their business. However, if AR is
important but not essential to competitive
advantage, firms can partner with specialty

software and services companies to leverage
outside talent and technology.
The challenges, time, and cost involved
in building the full set of AR technologies
we have described are significant, and
specialization always emerges in each
component. In the early stages of AR, the
number of technology and service suppliers
has been limited, and companies have built
internal capabilities. However, best-of-
breed AR vendors with turnkey solutions
are starting to appear, and it will become
increasingly difficult for in-house efforts to
keep up with them.
5. How will AR change
communications with stakeholders?
AR complements existing print and 2-D
digital communication approaches and in
some cases can replace them altogether.
Yet we see AR as much more than just
another communication channel. It is a
fundamentally new means of engaging
with people. Just consider the novel
way it helps people absorb and act on
information and instructions.
The web, which began as a way to share
technical reports, ultimately transformed
business, education, and social interaction.
We expect that AR will do the same thing
for communication—changing it in ways
far beyond what we can envision today.
Companies will need to think creatively

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