Its the Software !

I remembered a few years back I was visiting some cities in China with a Hong Kong friend, and commented on the rapid beautification and transformation of the various cities there. He then commented that China still has a long way to go, that while skyscrappers were going up all over the place, it was all hardware and no software. What he meant that in spite of the great buildings and roads that you see around, China still has a long way to go because the people’s skills and thinking ( the software) will take a long time to transform than the hardware. So while Shenzhen looks every bit as impressive as Hong Kong, or Shanghai every bit like New York, the comparison ends there. Beneath the impressive glass buildings, the software still needs a lot of retooling and works.

Recently, I have read Thomas Friedman, a noted New York Times journalist commented it in even greater detail in his book, Lexus and the Olive Tree, which talks about the trends of globalization.

In fact, he compared the country to the basic choices you get in the computer. First, he says, is the hardware, which for him was the actual shell around the economy. Here, he says, is whether the country choose to have a free-market economy or a communist one, or something in between. Basically like the computer war, the hardware war is over — people all over the world have chosen that it would be the capitalist , laissez faire market economy.

What is the competition now of nations is how well they implement the ” operating system” of the hardware, and also the software application itself ( which essentially and paradoxically is the same issue in the world of IT — it is the software plus how it is properly implemented and executed that counts. Hardware nowadays is almost a non-issue). A large number of countries, including countries in South America, Eastern Europe and all over Asia now are adopting the basic hardware of liberalized markets, but many of them are not implementing the software components or managing it effectively.

What does ” software” consititute? It is the measure of all things that fall broadly in the category of the rule of law, and the degree of which its officials and citizens understand, embrace and make it work. It includes banking laws, commercial laws, contract laws, business codes of conduct, property rights, judicial integrity, accounting standards, regulatory agencies, and others. As he say, the hardware is easy, but the software works is difficult.

It is easy to open a stock market, but the challenge is really how to enforce the law so that it will protect also the people and its investors. It is easy to permit free press. What is difficult is to establish a free yet responsible and credible press. It is easy to open up a country to importation liberalization. What is difficult is how to put the process to execute it properly so that local manufacturers, and even legitimate importers will not get burned.

Similarly for businesses, the argument is no longer that you should have a good inventory and logistics system. Rather it is how comprehensive and well-implemented your whole process become. There is no more argument that you should computerize your payroll system, but rather how well it is executed. Merely having one is no longer a competitive edge, because everybody is supposed to have one. Database and groupware systems abound, but how well the features work together in enhancing communications, and retaining as well as presenting important information and analysis so that data becomes intelligence and a source of important decision making will determine the winners.

The software challenge continues, for countries and governments, as well as businesses. The challenge and the winners will be determined how countries and businesses choose and execute the various aspects of the software.

In most business situations, similar challenges are — whether you are talking about technology, music, movies, and others. Software determines the hardware. There is a similar cry that what will make a person valuable is not anymore his technical skills, but his soft skills.

I close with a quote from Lao Tzu ( although made in another context, and with a different presumption) , made over two thousand years ago, but as relevant today , “The softest things in the world overcome the hardest things in the world”.

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