The Intangible Economy

The BLS jobs data for June saw a slight increase in the unemployment rate -- up 0.1% to 9.5% -- and a larger than expected increase in the employment decline (467,000). As the New York Times and the Wall Street Journal noted, the number had been expected to be around 365,000.

Once again, however, I do see one of those famous (infamous?) "green shoots" in the data on involuntary underemployed (part time for economic reasons). That number has been relatively stable for the past four months at around 9 million underemployed. As I said last month, not great news, but possibly an indicator of a bottom.

In an earlier posting, I noted that the "cash-for-clunkers" program might result in an increase in uncertainty for car buyers - and a temporary decline in sales while people wait for the program to be implemented.

Well, the June car sales figures are in, and as a story in the Washington Post relates:

Economists say consumers are warily making purchases again. Yet some held off last month, as Congress rallied to pass the "cash for clunkers" bill, which gives consumers vouchers to purchase new, more fuel-efficient cars and trucks when they trade in older models. "It certainly put some people on the sidelines," said Mark LaNeve, GM North America vice president of sales, service and marketing.

Don't get me wrong - I think the program is a good idea. And Congress is to be praised for enacting the program quickly. An extended debate would likely have hurt sales even more.

But it does speak to the need to carefully look at effects of the transition periods while new programs are being implemented. Another case in point is the new credit card regulations -- where companies are raising rates before the new law can take effect (see story in Washington Post).

As I said earlier, this is all a great opportunity for the behavioral economists to make an important contribution to economic policymaking.

Over at Idea Connections they have a great interview with Tom Kelley - General Manager and co-founder of IDEO (with his brother David Kelley) . There is far too much in the interview for me to try to summarize. Trust me - you just have to read the whole thing.

However, there are a couple bits I will highlight. One has to do with the importance of "being there." At lot was written years ago about how modern information and communications technology (ICT) would result in the "death of distance." IDEO uses a lot of collaborative technologies. They have operations spread across the globe. But this quote from Kelley is telling.:

We did an IDEO off-site recently where we had presentations from every office in the firm and, for the first time, we made extensive use of video conferencing. It's getting better, but even so we still believe that whenever possible at the beginning of a project, or at the time of the formation of a team, there still is no substitute for getting people together face-to-face. Even if only for the first week. The reason is friendships get made and bonds are formed when having dinner together after hours and during sidebar conversations about what people have in common - such as hobbies and other interests. In a videoconference participants are not likely going to be able to have those types of conversations.

. . .

The second bit is about the "abundance mentality."

The opposite of an abundance mentality is a scarcity mentality. If people have a scarcity mentality about their ideas, and we've all encountered people like this, they've usually got one favorite idea. They've been plugging at this one idea for the last decade, and are worried about not getting enough credit for it. They're defending their idea--even if it's weak they're defensive about it.
If you can have the opposite attitude - an abundance mentality - it goes a long way towards fueling a culture of innovation. With this mentality you are more likely to say, "I've got this idea, but you may take it and build on it." You and the other person go back and forth and when he or she says, "This part won't work", you are more likely to reply, "Okay, how can we make it work?" rather than, "No, I think it will". You are not defending your turf all the time.
In an abundance mentality, you are more generous with your ideas because you know you've got more. This allows you to blend and mix your ideas, and to get synergy. It's an important cultural value that contributes to innovation.

I think our current discussion about intellectual assets suffers from the scarcity mentality. This especially manifests itself in the focus on intellectual property -- which is based on a "its mine, you can't have it" argument. The standard idea is that unless you can prevent others from using this asset (which is by its very nature non-rival and non-excludible), there will be a serious free-rider problem which will distort the incentives to invest. Without investment, there will be no innovation.

Kelley's comments turn that concept on its head. Sharing and building on shared knowledge is the key to innovation. Without sharing, there is no innovation.

Obviously, the dynamic of innovation doesn't fall perfectly or exactly into either of these two arguments. Both sharing and protection to provide incentives are important. The trick - as is so often in live - is to get the balance right.

But first, everyone has to understand there is a balance to be reached -- something that I'm afraid is not always in evidence in discussions over IP.

. . .

The third bit is these snippets on the fusion of goods and services and the important of non-technological innovation. The first is this:

By the way, only about 30% of the innovations we do these days at IDEO are with products.

And then there is this point that I have been trying to make over and over and over again:

The iPod became the leading music player in the world because of the link between iPod hardware and iTunes. It became super easy to download music, and it's this design experience that's created billions of dollars of value for Apple.

. . .

As I said, a lot there.

I was recently at a conference where Klaus Hoehn, the VP for Advanced Technology and Engineering for John Deere spoke. He made a very interesting off hand comment. He said that Deere was in the business of providing functionality -- and was moving toward providing integrate customer solutions.

His comments recalled to mind a story of innovation in Christensen's The Innovator's Dilemma about steam shovels (see summary). One company was in the business of building bigger shovels with greater power. And the best technology was the cable system. Another company, however, developed the new hydraulic system was not as good as the steam cable system -- but was very suited to narrow spaces. They got in the business not of providing big powerful shovels but of digging narrow trenches (such as for pipe laying or house foundations). Functionality - not a specific product.

The Deere quote is similar to what we keep hearing from a lot of companies. The mass production model (of more and more of the same) is giving way to the customization model. This is a trend we have been talking about for some time -- and that helps define competitiveness in the I-Cubed Economy. But we are just beginning to bring our mindsets around to what it means. Originally, customized manufacturing meant the flexibility to run smaller batches of mass produced goods or to add certain features to a basic product. Hence it was also know as flexible manufacturing.

However, at its heart, customized manufacturing really means providing the customer with a product uniquely suited to their needs. The phrase "just-in-time; just-for-me" has been used to describe this level of customized goods. It is not about the product; it is about the customer.

From that perspective, distinction between manufacturing and services begins to blur. What business am I really in? Is my business making backhoes? Or is my business selling contractors ways to make holes in the ground? With that question comes a change in orientation from making the product better to providing "integrate customer solutions."

The classic case is Rolls-Royce as noted before. The aviation division of Rolls doesn't sell jet engines, they sell thrust in the form of hot air out the back of airplanes. The monitoring and servicing of the engines is as important as their manufacturing. And the servicing works because they designed and built the engines in the first place.

By the way, the same shift is happening in "services" -- at least in some areas. What does the customer need rather than how to I make my particular service faster, better, cheaper. It is really a shift from efficiency (the focus in the industrial age) to customer-focused innovation. (Note: I have to use that clarification of "customer-focused" since most of our view toward innovation is still on making the product the faster, better, cheaper).

That is not to say that faster, better, cheaper is not a factor. But faster, better, cheaper is not any of those if the product really doesn't suit my needs. If what I want to do is travel a mile from my house to my office, a bicycle or a bus may be a better solution than a Ferrari.

The switch in focus from the product (good or service) to the customer needs is a move beyond the age of mass production/mass consumption. The switch is well underway in the economy. Businesses, like Deere, understand this.

So, what are the public policies appropriate to this new era?

There was an interesting piece over in Joff Wild's blog at IAM Magazine about an Ocean Tomo ratings deal with France's state bank. According to the piece:

The Chicago-based merchant banc has agreed a working protocol with Caisse des Dépôts, the development bank owned by the French state, that is expected to lead to the creation in the autumn of the first ratings platform for European patents. This would be an OT/Caisse des Dépôts joint venture based on the ratings platform that Ocean Tomo already has for US patents.

Wild implies that this is a move toward setting up a European IP transactions market. In other words, the joint venture will be a patent analytic service.

I wonder if this might be headed in a different direction. One of Caisse des Dépôts responsibilities is the development of French SMEs -- especially helping to find financing. Could it be that this new patent rating system is the beginning of IP-based lending on behalf of the bank? Given the need to have such a rating system in place to underpin any lending program and given the bank's basic mission, it seem like a logical fit.

Anyone out there have any additional information?