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October 28, 2005
Rediscovering the "Skunkworks"
Seems like every so often we need to re-discover some old ideas. For example, we are re-fighting all the battles from the 1980's over science and technology policy and funding. Now, it seems that business (or at least the business press) has re-discovered a key element in our innovation-system: the skunkworks (or to use the more dignified term, the "innovation lab"). Here is Business Week's latest praise of skunkworks - "Mosh Pits" Of Creativity:
The Razr, Motorola's (MOT ) half-inch-thick, ultralight cell phone, broke a few rules in the industry when it appeared late last year. It's impossibly compact, simple to operate, and elegant, with an artfully hidden antenna and impressive photographic capabilities. The phone marked a sleek detour from the drive toward bulky features, such as powerful storage devices and high-power cameras, that were fattening up phones and preoccupying rival cell-phone makers. No wonder the Razr has sold a breathtaking 12.5 million units in less than a year.
But Motorola also had to break some internal rules to get the Razr to market. The biggest: Much of the critical work on the phone was done at a downtown Chicago innovation lab known as Moto City -- rather than solely in the company's sprawling traditional research and development facility in suburban Libertyville, Ill. Decorated in a trendy palette of oranges and grays, Moto City fills the 26th floor of a high-rise once occupied by a dot-com.
To hustle the phone into production, Motorola engineers left their cubicles in Libertyville to team up with designers and marketers 50 miles to the southeast in Moto City. With its open spaces and waist-high cubicles for even senior managers, the lab fostered teamwork and a breaking down of barriers -- both of which contributed to the success of the project. Razr developers, for instance, bypassed a normal process of running new-product ideas past regional managers across the world. Because they wanted to lead the market, not just give managers and customers what they thought they wanted, the Razr team put aside normal practices. "We did not want to be distracted by the normal inputs we get," says Gary R. Weiss, senior director of mechanical engineering. "It would not have allowed us to be as innovative."
FASTER, FASTER
Innovation labs are a key part of a movement to overhaul old-style R&D. They are designed to complement, and sometimes even replace, the intensive traditional system -- which required that scientists or engineers toil away privately for years in the pursuit of patents, then hand their work over to product developers, who in turn dropped it onto designers' and marketers' laps for eventual shipment out to the public. The leisurely old handoff approach worked fine a few decades ago, when the likes of Bell Labs and RCA Laboratories could take years to develop transistors and color TVs, knowing they would enjoy protected markets for years more. But today's rapacious competition means innovations grow stale fast. Companies must churn out updates far more quickly. Already, Motorola has unleashed follow-on phones, such as the candy-bar style Slvr and the rounded, pert-looking Pebl, along with a bevy of novel colors, such as hot pink, for the flip-top Razr.
Since Lockheed's Skunk Works started in the 1940's, I find it amusing to see the concept now touted as a radical break from past decades. In any truly innovative company, the old over-the-transom method of product development (scientist to product development engineer to designer to marketing) went the way of the dinosaur many years ago. (In fairness to the author, the piece does discuss other companies who use the innovation lab model and the difficulties these labs face.)
But, as the article illustrates, this old version of the innovation process remains fixed in our minds. No where is that more evident that in Washington. Our entire so-called innovation policy is built upon that pipeline model. Our debates are over how to create more inputs to that pipeline: increasing the number of scientist and engineers; improving math and science test scores; and, expanding funding for science.
What about the other parts of the system -- the designers, the product developers, the marketers? Not only are they completely left out of the process by this policy myopia, their contributions are downplayed (such as in the statements that the study of arts and crafts is useless to production and should be replaced by more science). Wrong! We need those folks who studied glass-blowing as well as those who studied differential equations. They all bring important skills to the process.
And what about the system as well? With policy focused on pushing more input into a pipeline that doesn't even work that way anymore, we are completely neglecting how the system really works. We need a policy that focuses on how the system works and how to improve the interaction among the various parts. There is a big push for funding of science and engineering students. How about support for students at the new Stanford Institute of Design? Or how about a program similar to the old Engineering Research Centers (ERCs) to replicate the Stanford model (and other variations)?
As long as our vision of innovation remains stuck in the industrial era model of the pipeline, we will continue, every few years, to re-invent to wheel -- of in this case, to re-discover the skunkworks.
Posted by Ken Jarboe at 11:44 AM | Comments (1) | TrackBack
October 27, 2005
Protecting your intangibles: Feta is Greek
Today, Tony Blair is seeking to re-start the re-start of Europe's competitiveness and budget framework at an informal summit at Hampton Court (Henry the VIII's old hang out). The talks will cover a number of topics, including the EU's internal battle over trade. While these fights are likely to continue, the EU Court has moved ahead with strengthening one form of intangible -- geographic indicators. The specific case: EU Court Gives Greece Full Rights to Feta Label
When the European Commission gave feta its protected designation of origin in 2002, it argued that natural, geographic and human factors had combined to give the cheese its specific Greek character. It said the extensive grazing of special ewes and goats on Greek terrain gave the cheese its specific aroma and flavor.
"The interplay between the natural factors and the specific human factors, in particular the traditional production method, which requires straining without pressure, has thus given feta cheese its remarkable international reputation," the court said.
German and Danish producers also have taken the lead in campaigns to have feta declared a generic product in recognition of the fact that production has spread well beyond the cheese's origin, and took the case to the EU's highest court. The court ruled that wasn't enough to claim the name, arguing several Balkan countries produced such a briny cheese for a long time, but all called it something different.
...
The EU's system of protecting traditional local products covers hundreds of drinks and foodstuffs -- including Denmark's Danablu blue cheese, Welsh lamb or Germany's Dortmunder beer.
The interplay of natural, geographic and human factors -- an interesting description of what others might call "Jurisdictional Advantage"! (See MaryAnn Feldman's discussion of that issue on the Athena Alliance website.)
Posted by Ken Jarboe at 12:27 PM | Comments (1) | TrackBack
Bernanke and the I-Cubed Economy
Yesterday I posted Stephen Roach's comment that Ben Bernanke's credentials as an inflation-fighter might not be the most importance aspect of the job Bernanke is about to take over. (Roach is more worried about a dollar crisis). In today's Wall Street Journal, David Wessel notes that the role of the Fed Chairman has evolved, especially under Greenspan, to include broader economic advice beyond monetary policy.
Mr. Bernanke knows his first mission is to build credibility as the chief helmsman of the U.S. economy. He'll avoid giving Greenspan-like advice on taxes and spending for a time, and may never be as influential on so many issues as Mr. Greenspan is. But, in a political system often unable to look beyond the next election, Fed chairmen see themselves as anchors of common sense. Mr. Bernanke is likely to be no exception.
Common sense, however, requires a deep understanding of the economy. Alan Greenspan understood the changing nature of the economy - the movement as he called it to a "weightless" economy. Bernanke kind-of understands, but is a way that makes me wonder. In a speech earlier this year (while he was still with the Fed), he talked about productivity and the role of intangibles. Rather than note how the structure of the US economy was changing (as has Greenspan), he discussed how information and communications technology (ICT) has led to an increase in productivity. This seems to be an extension or variation of the standard "capital-deepening" explanation -- better tools. To his credit, he does understand that the productivity gains are coming from the ICT-using sectors as well as the ICT-producing sectors (what we normally think of as "high-tech").
When it comes to the role of intangibles, Bernanke discusses how intangibles are necessary to utilize ICT:
Some observers have characterized the new information and communications technologies as general-purpose technologies (GPTs), which means that--like earlier GPTs such as electrification and the internal combustion engine--they have the potential to revolutionize production and consumption processes in a wide variety of contexts (Bresnahan and Trajtenberg, 1995). To make effective use of a GPT within a specific firm or industry, however, managers must supplement their purchases of new equipment with investments in research and development, worker training, and organizational redesign--all examples of what economists call intangible capital. For example, to realize the benefits of its ICT investments, Walmart had to reorganize work assignments, retrain workers, develop new relationships with suppliers, and modify its management systems. Although investments in intangible capital are (for the most part) not counted as capital investment in the national income and product accounts, they appear to be quantitatively important. One recent study estimated that, by the late 1990s, investments in intangible capital by U.S. businesses were as large as investment in traditional, tangible capital (Corrado, Hulten, and Sichel, 2004).
Recognizing the importance of intangible capital has several interesting implications. First, because investment in intangible capital is typically treated as a current expense rather than as an investment, aggregate saving and investment may be significantly understated in the U.S. official statistics. Second, firms' need to invest in intangible capital--and thus to divert resources from the production of market goods or services--helps to explain why measured output and productivity may decline initially when firms introduce new technologies. Finally, the importance of intangible investment explains to some degree why the lags between ICT investment and the resulting productivity gains can be long and variable. Because investments in high-tech capital typically require complementary investments in intangible capital for productivity gains to be realized, the benefits of high-tech investment may become visible only after a period of time.
In this discussion, Bernanke does not seem to acknowledge the role of intangibles as a driver of both innovation and productivity, unrelated to the utilization of ICT. In fact, there is one phrase from the above quote that specifically worries me: "firms' need to invest in intangible capital--and thus to divert resources from the production of market goods or services." This places intangibles in a secondary position, something one derivation way from actual production, rather than at the core. Investment in intangibles is like any other investment in productive capacity. Would that phrase make as much sense if it read "firms' need to invest in machinery--and thus to divert resources from the production of market goods or services?" Only if he is referring to investment as diverting resources from current operations. But I don't think that was what he meant.
Granted, the entire phrase acknowledges an important point: that output and productivity often initially declines with the introduction of new technology because of the learning process and the changes to the production process that may be needed to maximize the utilization of the technology (which should rightfully be considered intangibles). He also recognizes that "general purpose technologies" such as electricity change the production process. Later on he makes reference to this as well: "And if rapidly improving information and communication technologies are truly general-purpose technologies, history suggests that they will continue to stimulate new ways of producing and of organizing production."
But, he really doesn't follow up on that point. He did not discuss was how the nature of work itself is changing. That is the key point which Alan Greenspan understands -- not just new ways of producing and organizing production of the same old products but radically new products services and production processes. If Bernanke is to play the role of the chief economic helmsman, he will need to deepen his grasp of what that economy looks like. He is close -- but maybe not yet all the way there.
I realize that this is an exercise in old fashion Fed-gazing (trying to discern what might happen from a few select statements). It is grossly unfair to characterize Dr. Bernanke's views on the basis of one speech. I'm sure we will learn more about how he sees the economy as the nomination progress.
Or, then again, we may not. This is the Fed after all, and far more powerful market players than me are dissecting his every word and action. He may learn very quickly to be extremely careful in what he says.
For all of us, it will be his actions, not so much his words, which will show whether he truly understands our economy. For all our sakes, I wish him well.
Posted by Ken Jarboe at 9:10 AM | Comments (0) | TrackBack
October 26, 2005
Fighting the wrong battle at the Fed?
The reaction to the nomination of Ben Bernanke to head the Fed has generally been positive. Not being a monetarist, I'll decline to comment on his inflation-fighting qualifications -- other than to note that by law the fighting inflation is only part of the Fed's job. There are two prime goals for monetary policy: promoting full employment and promoting stable prices. The Fed is also the guardian of the stability of the banking and monetary system.
Which leads me to Stephen Roach's comments in the LA Times, "The ambush waiting for Bernanke":
Bernanke is widely thought to be the perfect central banker to cope with this problem. He is renowned for his skills as an inflation fighter. He has led the charge in the academic debate over "inflation targeting" -- arguing that a central bank needs to be explicit in aligning its policy instrument (the federal funds rate) with a numerical target of price stability (a 1% to 2% increase in the "core" consumer price index).
But I suspect that the current inflation scare will turn out to be a false alarm. As always, energy prices will come down when demand sags -- some of that may already be occurring -- and the new and powerful forces of globalization should continue to hold other prices largely in check.
The U.S. economy actually faces far greater threats than inflation -- threats that an inflation targeter such as Bernanke may be ill-equipped to deal with.
At the top of the list is a record U.S. current account deficit -- the broadest measure of the nation's trade balance (imbalance, in this case) with the rest of the world. Running at an annual rate of close to $800 billion in the first half of 2005, it requires foreign funding to the tune of $3 billion per business day. To accomplish that without a sharp drop in the dollar and/or a related backup in interest rates requires extraordinary confidence on the part of foreign investors in U.S. assets.
The foreign confidence factor could well be Bernanke's biggest challenge when he takes the reins at the Fed. The nation's current account deficit averaged just -1.5% of gross domestic product at the three most recent Fed transition points -- the ascendancy of Miller, Volcker and Greenspan.
By contrast, today's deficit is more than four times larger at -6.4%. Moreover, in the face of an energy shock and a post-Katrina fiscal spending binge, there is good reason to look for a further reduction in U.S. saving and a related widening of the current account deficit over the next year.
In short, the U.S. is going to be asking a lot more of the foreign investor at precisely the moment the Fed is transitioning from Greenspan to Bernanke. As the maestro leaves the building, the hard-won aura of foreign confidence that surrounds him could be quick to follow. Bernanke could be faced with a dollar crisis and the related need on the part of foreign investors to seek compensation for taking currency risk. That compensation invariably spells higher interest rates -- the last thing the nation's housing bubble and overly indebted consumers need.
I'm not sure I agree that higher interest rates are necessarily bad. But I do agree that the Feds decisions are likely to revolve around reactions to what foreign investors do. Our huge current account deficit makes that an inevitability.
Welcome to what might be the toughest job in Washington, Dr. Bernanke!
Posted by Ken Jarboe at 3:49 PM | Comments (0) | TrackBack
October 25, 2005
A model for the I-Cubed Company
When one thinks of possible models for a company in the I-Cubed (information, innovation, intangibles) Economy, the inclination is to look at the high-tech or the "creative" sectors of the economy: electronics, software, advertising, etc. How about industrial components - specifically Illinois Tool Works? ITW is a company that is "a hodgepodge of mundane products, from automotive components and industrial fasteners to zip-strip closures for plastic bags and laminates for flooring and countertops." That is how Business Week describes it in their profile of the company No Need For Economies Of Scale. It is also a company where "its research and development outlays come to just 1% of sales, a miserly budget for even a bulk-commodities producer."
But, as Business Week points out, "ITW routinely finishes among the Top 100 patent recipients in the U.S. every year, ranking 66th last year, with 301 new awards and 468 applications."
The secret? Entrepreneurship and attention to customization.
ITW owes its outsize achievements to its unorthodox business model. Like many old-line outfits, the company gets most of its growth from acquisitions; it has averaged 28 deals a year over the past decade. But management does not then merge the new units with old ones to reduce payroll and other expenses. Instead, it retains them as freestanding entities to maintain their entrepreneurial drive and keep them close to their customers. Today the $11.7 billion conglomerate operates through 665 separate businesses, each with its own profit and loss statement.
The company also practices something it calls an 80-20 philosophy. The term derives from the fact that 80% of sales and profits often come from just 20% of customers. Once this top tier has been identified, management then lavishes attention on it -- including custom-designed products -- to maximize the return from ITW's personnel and assets.
As the CEO, David Speer, explains:
Our business model is the antithesis of scale. To begin with, our organizations tend to be small and lean. If I were to look at combining several units, the real cost savings we would wring out would be relatively modest. Smaller, more tightly focused units also have a greater entrepreneurial spirit; there's greater participation by the employees in the business. That leads to greater intimacy with the customer and better understanding of new opportunities.
The antithesis of scale -- what a great way of putting it.
However, Speer is not completely correct when he says that. ITW does get traditional economies of scale in its concentrated production that comes out of the 80-20 philosophy.
We take the 80-20 approach and dedicate production lines and resources to high-volume products. A line will run only those three or four products, if that's the case, which represent the 80% of that business. We're able to make fewer changeovers on these lines and can increase the life of the tooling. Runs that are much longer are more efficient. By physically linking machines, we're often able to eliminate work in process and storage areas, which means a smaller footprint. And, of course, all the material handling and indirect costs are reduced. That doesn't mean we don't pay attention to the other 20% -- we just manage them separately.
Customized production married to dedicated production. An interesting model for manufacturing in the I-Cubed Economy.
But, before you start touting this model as the savior of American manufacturing, with 21 businesses in China Speer is clear about the need to be in overseas markets.
We operate with the basic philosophy that we want to produce where we sell. If I'm going to sell a product in China, I want to produce it in China. If I want to produce locally, then I have to be able to compete locally and make a decent return.
It may not be the model of the globally competitive company that we normally think of. But ITW's attention to local markets may be the way that American manufacturing can hold on to a portion of the ever-changing world market.
Posted by Ken Jarboe at 3:55 PM | Comments (0) | TrackBack
October 18, 2005
Just the beginning of the connected world
It seems like every day we are bombarded with news about the latest in connecting our world (can't say "wiring our world" any more since some of it is wireless). Blackberries and Palms will soon talk to one another. WiMax is replacing WiFi, making "hot spots" an anachronism. (What will all those coffee shops do?) Broadband will be available everywhere over power lines.
From all appearances, the always-connected world is rapidly approaching.
This constant connectivity is having its impact, as CNN reports in Wireless technology changing work and play
The eroding distinction between work and play is one of the many paradoxes at the heart of our increasingly wireless world.
That is an issue that human beings have always faced - expect for the brief period of the factory-age. The 9 to 5 job somewhere distant from the home is a recent phenomenon. Before, people always balanced work and play - because both work and play were ever present in their daily lives, not something that one did in one place and something one did over someplace else.
In the connected world, we are simply returning to the older pattern.
And the solution to the eroding distinction? It is called an "off" switch.
Posted by Ken Jarboe at 12:31 PM | Comments (0) | TrackBack
October 14, 2005
Students don't pay attention in class -- duh!
Sometimes technology will change people's behavior in major ways. Other times the technology will be adapted to basic behavior (but may result in subtle changes). In the latter category is the use of computer laptops in the classroom, as related in this Wall Street Journal story: The Laptop Backlash:
Dennis Adams, a computer-systems professor at the University of Houston, was thrilled a few years ago when his school began providing laptop computers to incoming students and set up wireless Internet access in classrooms. But in the past year, his enthusiasm has turned to dismay.
A recent visit to his class -- where about half the 26 students are using laptops -- explains why. While Prof. Adams lectures, five students use an online chat room to post comments on his lecture, on classroom stragglers, and on the meaning of his discussion questions. Another student spends nearly two-thirds of the three-hour class playing computer chess, instant messaging and viewing photos of a fraternity party posted on the Web. Meanwhile, 23-year-old Mike Fielden buys a pair of sneakers on eBay.
The story goes on to talk about how wide spread the problem is - and how universities faced a similar problem earlier.
The unintended consequences of wiring up classrooms echo an earlier rash of problems after colleges provided high-speed Internet access to dorm rooms. The hope then was that students would use the Internet for research and homework. Instead, many students wasted lots of time sending instant messages and illegally exchanging music files.
Guess what -- college students don't always pay attention in class. And they think that listening to tunes is cooler than doing homework. Why should this surprise anyone? After all, I'm sure many of us sat through enough boring lectures to understand this phenomena (and may have, as in my case, give a few boring lectures as well). And how many of you even today sit in a boring conference checking your emails and surfing the web at your laptop while the speaker drones on.
The answer isn't to ban the technology - which some universities have tried.
But it isn't that easy. When UCLA's Anderson School of Management installed wireless-blocking technology in its classrooms two years ago, the effort disrupted network use in offices and halls as well. Last June, a faculty committee concluded that stopping the signals amounted to a technology arms race that couldn't be won and yanked out the blockers. After all, the panel reasoned, merely blocking wireless computer networks wouldn't stop cellphones with Internet access.
The answer -- and here is where the subtle change in behavior comes in -- is better presentations.
Some professors have responded to the prevalence of networked computers in class by changing their teaching styles. The University of Houston's Prof. Adams, for instance, now peppers his lectures with enough questions to reduce students' Web surfing. When he is discussing a particularly complex subject, he says, he tells students to close their laptops.
If laptops in the class room have the ultimate effect of forcing professors to teach better, then I would say the digital revolution has really paid off.
Posted by Ken Jarboe at 2:26 PM | Comments (0) | TrackBack
. . . meanwhile in the UK, a blow against "stifing patents"
This, in today's Financial Times: Call to restrict 'stifling' patents:
An international group of academics, scientists and artists has called for strict limits on patents and copyrights, concerned that the spread of intellectual property protection is suppressing knowledge and stifling creativity.
A charter on intellectual property (IP), developed by the Royal Society of Arts in London, calls for an automatic presumption against creating new protection or extending existing rules.
It also argues that patents and copyrights should not be allowed to apply to computer code, business processes, scientific theories or abstract data.
Today's intellectual property regime was "radically out of line with modern technological, economic and social trends", said the charter.
The story refers to the Adelphi Charter on Creativity, Innovation and Intellectual Property released yesterday in London. The charter "promotes a new, fair, user-friendly and efficient way of handing out intellectual property rights in the 21st century."
As anyone who has followed this blog knows, I believe that our IPR system is out of kilter and need to be re-balanced to meet the needs of users and producers in the I-Cubed Economy. Given that the Royal Society of Arts has stepped up to the issue, let's hope that there is some serious discussion of the matter.
Posted by Ken Jarboe at 10:26 AM | Comments (0) | TrackBack
IPR and the Doha Round WTO trade negotiations
For those of you interested in intangibles (specifically IP) in trade law, there is an informative summary on the Intellectual Property Watch blog about IP Issues Reappear On Agenda Of WTO Talks. According to this report, the agenda includes: a formalization of the earlier agreed upon public health waiver on drug patents; a "geographical indications rights" proposal to set up a registry of protected names (naming rights) for items like food deriving their name from a specific geographic area (such as Parma ham); and, a proposal to require the disclosure of the origin of material or traditional knowledge in patent applications.
Frankly, these issues will be a sidelight to the main talks centering on agriculture and services. As such, decisions on these IPR issue may get made as part of larger deals - or at the last minute without much attention. I don't view any of the three IPR proposals as of earth-shattering concern. But, it will be best to at least keep an eye on them.
Posted by Ken Jarboe at 9:41 AM | Comments (0) | TrackBack
October 13, 2005
Place matters - Marc Andreessen
Ponder this quote from Marc Andreessen, the man who invented the Web browser that allows all of us to work wherever we want. (From Business Week interview - Andreessen: Innovation Is Humming) (Note: Zend is an Israeli company whose Board Andreessen just joined.)
Q: You mentioned Zend's decision to relocate its headquarters to Silicon Valley. What do you think of Silicon Valley's stature in the tech world? Why is it still important to be here?
A: Overall, it's the combination. There's a critical mass of investors -- way more than anywhere else, which does matter. [There are] sales people, executives, accountants, lawyers, bankers, and you're in the flow of what's actually going on. [Being in tech and not being in Silicon Valley] is like trying to be in the movie business not in LA or trying to be in national politics and not be in D.C. You just don't know what's going on half the time. You get outside the valley and you're not aware of next six startups that just got funded. That actually matters.
Even in the most connected areas, face-to-face and being there -- inside the critical mass -- still matters.
Posted by Ken Jarboe at 12:36 PM | Comments (0) | TrackBack
August trade in intangibles
This morning's data released by the BEA shows a worsening of our overall trade deficit - growing by a billion dollars from $58 billion to $59 billion monthly. Much of this is due to rising energy prices.
But, the surplus in our balance of trade in intangibles actually increased in August due to an increase in exports of business, professional, and technical services, insurance services, and financial services (labeled as "other private services" - see definition below). The intangibles surplus grew by almost $270 million to $6.7 billion. This is the first month this year with an increase in the surplus in intangible trade. Up until August, every month in 2005 had recorded a worsening trade balance in intangibles
Even so, the improved balance in intangibles is utterly swamped by the growing monthly deficit overall.
The deficit in Advanced Technology Products narrowed somewhat in August to $3.3 billion (from a deficit of $4.2 billion in July) as exports rose much greater that the increase in imports. The last monthly surplus in this category was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
As I've said when I started publishing this data earlier this year, intangibles, in and of themselves can not offset our huge and growing deficit in goods. The power of intangibles is how they re-invigorate all sectors of the economy. Utilizing that power to transform manufacturing is the only way we will get our dangerous trade deficit under control.
Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:
Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.
Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.
Posted by Ken Jarboe at 8:52 AM | Comments (0) | TrackBack
October 12, 2005
Consequences of information overload
It is exactly what you thought was going on -- the number and length of TV adds is increasing. In fact, some TV shows, such as Desperate Housewives, have been restructured into 6 acts (from 4) so there are more opportunities for ads, according to a recent story in USA Today - Ad glut turns off viewers. But more, is not always better:
advertising researchers say the cluttered airwaves, which also include logos and promos during shows, risk turning off viewers even from must-see shows and worsening recall of their ads.
The cluttering of the airwaves has an even more serious consequence that a sore thumb from hitting the mute button. The images can end up dulling our responses to the realities around us. One example is a recent ad featuring the Smurfs - where (according to the Wall Street Journal The Evening Wrap - War and Smurf):
The video begins with the Smurfs happily doing their thing, but ends with most of the village apparently slaughtered, with Baby Smurf left wounded and screaming amid the carnage. The cartoon is scheduled for wide airing in Belgium this week, but a sneak preview last week reportedly left several real-life babies crying, as well.
The reason to run the ad?
A spokesman for UNICEF, which is trying to raise money to rehabilitate child soldiers in Burundi's brutal civil war, told the U.K.'s Daily Telegraph that it made the cartoon because real-life images of war had lost the power to convince TV viewers to open their checkbooks.
Pictures of babies dying on the news we tune out; images of Smurfs in carnage still grabs our attention.
Interesting commentary on the de-sensitizing power of information overload. No wonder advertisers are worried about ad glut.
Posted by Ken Jarboe at 4:30 PM | Comments (0) | TrackBack
Intelligent design, the flu and markets
From Holman Jenkins, Jr.'s Business World column in today's Wall Street Journal - There's Something Catching in Washington:
Almost everything about last week's flu panic goes to show why "intelligent design" simply makes a bad argument -- because it relies on the baseless assumption that complexity is evidence of design, a notion belied by everyday experience. Our economy achieves its complexity precisely because no one is in charge. Our politics creates order for 300 million contentious citizens in ways more supple and efficient than any authoritarian could impose.
Amen to that!
(wait a second, am I agreeing with a Journal editorial columist?)
Posted by Ken Jarboe at 3:42 PM | Comments (0) | TrackBack
Offshoring -- changing the story line to make it look better
Apparently, the Commerce Department's big study of offshoring has come up as a bust. According to Business Week, the recently released report is nothing like the original staff drafts - Just The Bright Side, Thanks
After holding off for more than a year, the Commerce Dept. has quietly released a study of offshoring - the movement of white-collar jobs to low-wage countries. But it's not the even-handed assessment completed by staff analysts in June, 2004, after six months of research. The staff report was largely ditched, say outside experts who heard the staffers' views. Instead, these critics charge, Commerce political appointees put out a 12-page report that portrays offshoring as an unconditional boon to the U.S. economy. After BusinessWeek's print edition went to press on Oct. 5, the Commerce Dept. responded by saying: "In carefully developing the report, we sought to ensure that it was thorough, objective and that the competitive environment was properly assessed and supported by hard data."
Commerce has only released its final report to Rep. Frank Wolf (R-Va.) who ordered it up, but BusinessWeek has obtained a copy, as well as a slide show tied to the original research, presented by staffers at a conference last December.
The staff researchers' presentation gave both the pros and cons, comparing factors that favor U.S. high-tech job growth with those that favor offshoring. The official version dispenses with most of the disadvantages. Instead it points to pro-offshoring studies done by McKinsey Global Institute and uncritically cites data from a lobbying group that represents the U.S. subsidiaries of foreign companies. "No objective analysts, even if they were in favor of outsourcing, would write a report like this," says Ron Hira, a professor at Rochester Institute of Technology, who saw the December presentation. To see the slide show and official report, go to www.businessweek.com/extras
As part of the story, Business Week has a copy of the report, as finally given to Congressman Wolf, online and of the original staff presentation.
I found it especially interesting that the sanitized version of the report cites the McKinsey Global Institute study on offshoring, which notes the US trade surplus in services. However, as regular readers of this blog will note, last month I posted an analysis that showed the surplus in intangibles (royalties, license fees and business services) is actually declining (see July Trade in Intangibles)! Any study published today that lauds our wonderful trade in services is at best out of date and at worst laughable.
What makes this exercise especially sad is the Commerce Department's deliberate choice to ignore a high quality analysis, as indicated in the staff briefing slides. The staff presentation seems to be a good foundation for addressing the issue. The US retains many advantages as a location for IT work. Those advantages include a stable nation, no cultural issues with US clients, strong data security and privacy protection, strong IPR, reliable telecom infrastructure, strong skills and market proximity.
But, the analysts were not at all sanguine about the problem. The implications of the current trends in the industry of rapid diffusion, improved education and training delivery systems, improved knowledge capture and sharing systems are that technical skills are becoming a commodity ripe for faster offshoring. This reduces the number of US jobs resulting from US innovations as those innovations mature and diffuse.
I was especially interested in the slides discussing the US advantages and the characteristics of the work that would favor keeping it in the US or favor offshoring (more on this later). Such a discussion is exactly the type of analysis we need if we are to confront the issue.
Too bad the Commerce Department has apparently decided to take the "make-happy-and-hope-it-goes-away" approach. Just when we could use some leadership on the issue . . .
Posted by Ken Jarboe at 8:24 AM | Comments (2) | TrackBack
October 11, 2005
Losing the competitiveness challenge - part two
Contrast the earlier posting of the decline of the US auto industry with this story about manufacturing resurgence in Japan - WSJ.com - Japan's Economy Gains Steam From Manufacturing Heartland:
NAGOYA, Japan -- In this Detroit-like landscape of auto plants, blast furnaces and machine shops, manufacturers have figured out how to produce something their competitors in America's Rust Belt have not: robust growth.
The economy of Central Japan's industrial heartland is booming, so much so that it is helping lift the world's second-largest economy out of 15 years of doldrums.
Property values in the provincial capital are surging. Packed restaurants are turning away customers. Tiffany, Armani and Coach have opened ritzy boutiques along its boulevards. Chauffeured sedans line up after hours waiting on executives cavorting in bars and nightclubs.
The rest of the country is now searching for the lessons to be drawn from the "Nagoya boom," which helped boost Japan's gross domestic product by 3.3% in its fiscal first quarter ended June 30. Nagoya's economic engines are the very businesses so often derided in other developed countries as "sunset industries": autos, machinery, steel, ceramics and chemicals. Yet in Nagoya, these industries are thriving in the face of low-cost global competition.
The developing world is teeming with manufacturers aiming to grab business from Japan, where costs are higher than anywhere else in Asia. Nagoya's manufacturers have kept them at bay with a maneuver now being copied by producers across Japan. They moved production of low-end products overseas, but continued to make lucrative high-end goods at home. Demand is growing for such products, which range from engines for hybrid cars to micro-robots for industrial use. To maintain its competitive edge, Nagoya spends robustly on research and development.
. . .
Manufacturing has been Nagoya's lifeblood since the 17th century. The region, which stands between Tokyo and the ancient capital of Kyoto in the south, has long prided itself on its tradition of "monozukuri," or craftsmanship. For centuries, the region's hamlets competed to construct the most intricate wooden theater dolls, a custom that continues to this day.
Industries sprang up to produce everything from straw tatami mats to textile machinery. In 1937, Toyota Motor Corp. was spun out of a textile machine maker. Nagoya was targeted by Allied bombers during World War II because it produced the agile Mitsubishi "Zero" fighter planes.
Toyota, which is building a new headquarters across the street from Nagoya's bullet train station, is one of the biggest engines of the region's economy. Toyota is growing faster than any other major car maker in the world today. Many of the more than 500 companies that supply parts to Toyota are also thriving.
Toyota's new president, Katsuaki Watanabe, maintains that the boom "isn't just about Toyota." About 60% of Nagoya's industrial base is nonautomotive. Tool maker Makita Corp. and steelmaker Daido Steel Co. are both located near Nagoya, as are fax machine and printer manufacturer Brother Industries Ltd. and Yamaha Corp., one of the world's largest makers of musical instruments. The area's kilns turn out everything from industrial tiles to fine china from Noritake Inc. Big diversified industrial companies, including Mitsubishi Heavy Industries Inc., run their aerospace divisions out of Nagoya, which is also home to a slew of suppliers to other industries, including die-casters, paint processors, and metal pressers, molders, grinders and refiners.
Part of the turnaround is due to that industrial production system of strong interconnections that many assumed died when Japan, Inc. faltered:
Toyota churns out Corolla compacts and Camry sedans in plants all over the world. But its premium Lexus vehicles, and its popular Prius model and other hybrids that use both gasoline and electricity, are made only in Japan. Recently, it has grown comfortable enough mass-producing the Lexus and the hybrids that it is planning to slowly roll out production overseas.
To maintain a pipeline of new high-end products for its Japanese factories to build, Nagoya-area firms spend amply on research and development. The intricate web of cross-shareholding that ties many of them together makes it easier for them to set aside capital for such long-term purposes.
Toyota, for example, holds shares of many of its suppliers. These suppliers in turn own shares of Toyota. If Toyota decides to spend money developing new products instead of reporting it as profit or returning it to shareholders as dividends, it is unlikely to hear complaints from supplier shareholders. Many of Toyota's U.S. competitors, in contrast, focus more sharply on the quarterly bottom line to satisfy shareholders and analysts.
The Nagoya approach "doesn't necessarily mean you don't generate returns for shareholders," says Paul Sheard, an economist at Lehman Brothers in Tokyo. "It means you have the freedom to make the best cars, and you don't have the capital markets breathing down your neck."
In the meantime, the powers-that-be in the US think we can survive as a "royalty" economy -- living on our past ideas.
Manufacturing is, and always will be, a part of the I-Cubed Economy. The sooner we get over this notion that information innovation and intangibles are a disconnected part of the economy - and start applying our information, innovation and intangibles to manufacturing - the better.
Posted by Ken Jarboe at 1:09 PM | Comments (0) | TrackBack
Losing the competitiveness challenge
Whenever the issue of America's competitiveness challenge is raised, one of the standard responses is "been there, done that, not a problem." These folks then go on to explain that the so-called competitiveness challenge of the 1980s was either just a figment of our imagination or a problem we easily overcame. After all, what ever happened to the feared Japan, Inc. takeover of American industry? The US did great in the 1990s while Japan faltered.
Well, look around. How is US industry doing? For example, how is the auto industry doing? The answer to that question can found in the words of the CEO of auto parts manufacturer Delphi in today's New York TImes: As Delphi Goes, So Goes G.M.? By the way, Delphi just filed for bankruptcy.
In an interview on Monday with reporters and editors at The New York Times, Mr. [Robert S.] Miller, who uses Steve as a first name, predicted that General Motors and the Ford Motor Company could find themselves following Delphi into bankruptcy court in the next few years unless they take drastic steps to reduce their own labor costs. Mr. Miller said his company would do what it could to prevent more bankruptcies in the industry.
But Mr. Miller, sounding like the Oracle of Delphi, made clear that he believed that the major auto companies were now engulfed in the same industrial turbulence that had forced the revamping of the steel and airline industries with which he was intimately familiar.
"This is not just a Delphi issue, this is an auto industry issue," Mr. Miller said, "and has to be dealt with" by G.M., Ford and Chrysler, a division of DaimlerChrysler. "I am very concerned about what happens to the Big Three. It is an incredible watershed for the entire industry as we head into the future."
We are now seeing the visible manifestation of the stealth erosion of our industrial competitiveness. While some downplayed the Japanese challenge, Japanese car makers steadily gained market share. Caught up in the dot-com hype, we generally ignored the transformation of manufacturing.
The auto wars of last quarter of the 20th Century are almost over. And the Japanese appear to have won.
One wonders if the same judgement will be made at the end of the first quarter of the 21st Century: America met the challenges of the age - by ignoring them.
Posted by Ken Jarboe at 11:42 AM | Comments (0) | TrackBack
October 7, 2005
Using science to change science
The recent announcement of Barry Marshall and Robin Warren's Noble Prize in Medicine has spurred some interesting commentary - not just for their findings that bacteria causes ulcers, but for the fact that they had to buck established conventional wisdom to prove their point. Some, such as the Wall Street Journal, A 'Preposterous' Nobel smugly tell us that this is "a useful reminder that just because there's a scientific 'consensus,' that doesn't mean it's true."
One wonders what consensus the Journal's editorial writers have in mind. Global warming? Evolution? Probably not the economic "Washington consensus," which encapsulates the Journal's theories on economic growth.
Rather than it an indictment of the "scientific consensus" or an example how science sometimes gets it wrong, this prize is a celebration of the process of inquiry and how science really works. It is an example of what Kuhn describes in the The Structure of Scientific Revolutions; it proves that science evolves through bold steps. Marshall and Warren join a long and distinguished line of scientist who bucked the system.
This Noble Prize also shows how science progresses through rigorous attention to the facts and the verification of those facts through experimentation. As Madeline Drexler describes in her article, A Nobel Prize for intuition:
At first, Marshall couldn't produce the crowning scientific proof of his claim: inducing ulcers in animals by feeding them the bacterium. So in 1984, as he later reported in the Medical Journal of Australia, "a 32-year-old man, a light smoker and social drinker who had no known gastrointestinal disease or family history of peptic ulceration" - a superb test subject, in other words - "swallowed the growth from a flourishing three-day culture of the isolate."
The volunteer was Marshall himself. Five days later, and for seven mornings in a row, he experienced the classic and unpretty symptoms of severe gastritis.
Scientific proof - not simply conjecture - is what won Marshall and Warren the Noble Prize. With scientific proof, the scientific consensus was altered.
That is exactly how the process is supposed to work.
For those who would defend their ideological preferences by pointing to how conventional wisdom and the scientific consensus was proved wrong, I would simply point out that at one point both evolution and global warming were once dismissed by those who upheld the conventional wisdom. They, like the theories of Marshall and Warren, eventually won out - because they best fit the facts.
Facts, information and knowledge - not ideology - are what drive the I-Cubed Economy.
Posted by Ken Jarboe at 12:28 PM | Comments (0) | TrackBack
Reexamining tax expenditures
Apropos my earlier posting on the need for reexamining our tax code for the I-Cubed Economy based on the experience of the American Job not-Creation Act, GAO has recently released a study on tax expenditures. Their findings are disturbing:
Whether gauged in numbers, revenues forgone, or compared to federal spending or the size of the economy, tax expenditures have represented a substantial federal commitment over the past three decades. Since 1974, the number of tax expenditures more than doubled and the sum of tax expenditure revenue loss estimates tripled in real terms to nearly $730 billion in 2004. The 14 largest tax expenditures, headed by the individual income tax exclusion for employer-provided health care, accounted for 75 percent of the aggregate revenue loss in fiscal year 2004. On an outlay equivalent basis, the sum of tax expenditure estimates exceeded discretionary spending for most years in the last decade. For some budget functions, the sum of tax expenditure estimates was of the same magnitude as or larger than federal spending. As a share of the economy, the sum of tax expenditure outlay-equivalent estimates has been about 7.5 percent of gross domestic product since the last major tax reform legislation in 1986.
All federal spending and tax policy tools, including tax expenditures, should be reexamined to ensure that they are achieving their intended purposes and designed in the most efficient and effective manner.
In other words, our budget is on auto-pilot with no one looking at whether or not our policies are working. Many of these tax deductions have economic and/or socially worthy purposes -- the charitable deduction, the homeownership deduction, the various savings deductions (IRS, 401(k)s, etc). But at least we need to periodically look at these policies. Spending programs are subject to such a periodic review; so should tax breaks. Without such a review, we are allowing policies designed for the industrial era (and even the agricultural era) to dominate the Federal budget as we make the transition to the I-Cubed Economy. And we don't even know what and where all these policies are! Not a good sign in what we like to call the "information" era.
Posted by Ken Jarboe at 11:14 AM | Comments (0) | TrackBack
October 5, 2005
American Job Creation Act - part 2
In an earlier posting (American Job Creation Act - not), I noted that so far that the tax breaks for repatriated earnings has yet to produce any evidence of increased investment in job-creating activities. Now, the Wall Street Journal has done its own analysis - and the answer is the same (Tax Break Brings Billions to U.S., But Impact on Hiring Is Unclear):
Most companies using the break have offered only broad outlines for how they intend to use their windfall. For the most part, they say they are using the bulk of the money for tasks such as paying down debt and meeting payrolls. Direct job creation rarely appears on the list.
Some companies are even bringing home piles of cash while continuing to downsize.
In fairness to the companies, it should be noted that money is fungible. It is difficult to track specific sources of investments. And money used to pay down debt frees up funds later on for investment:
Companies that beef up their balance sheets are stronger competitors and "better positioned to grow in the future," says Daniel Clifton, executive director of the American Shareholders Association, a group that lobbies for shareholder interests. He and others say there also is an indirect impact; for instance, companies using the funds to buy capital equipment may create jobs on factory floors for workers making those machines.
"It filters down into the broader economy -- by people who are making the equipment that's being bought," Mr. Clifton says. "It's going to continue to increase factory output. And so the people who are not repatriating are still getting jobs created."
However, I am generally leery of this trickle-down theory of investment. As I noted earlier, tax breaks are the most common form of industrial policy in the US - and the least transparent and the most difficult to assess.
The one-time nature of the program also creates what my conservative economist friends worry about: moral hazard.
Some analysts contend that by offering a one-year break, the law actually encourages companies to horde profits overseas in the future, since they are likely to expect this to happen again.
The American Job not-Creation Act is a perfect example of our non-investment and non-industrial policy: wonderful politics and dubious policy.
Posted by Ken Jarboe at 10:48 AM | Comments (0) | TrackBack
Defensive use of IPR
In many of my postings on IPR, I refer to that fact that patents can be used both as an offensive tool to push new products and as a defensive weapon against competitors. Here is an example of the use of a patent for what appears to be a defensive move: WSJ.com - Sprint Nextel Files Patent Lawsuit Against Vonage
Sprint Nextel Corp. said it filed a patent-infringement lawsuit against Internet-calling company Vonage Holdings Corp., alleging it infringed on seven of its patents for sending phone calls over data networks.
The suit, which also names Internet-calling start-up Theglobe.com Inc. and its Voiceglo Holdings Inc. unit, comes a few months after Sprint Nextel and Vonage scuttled preliminary merger discussions, according to people familiar with the situation.
The legal battle comes as Vonage, the nation's largest provider of household phone service based on Internet technology, prepares for an initial public offering. The company, based in Edison, N.J., also is exploring merger possibilities, according to people familiar with the matter.
Posted by Ken Jarboe at 9:03 AM | Comments (0) | TrackBack
October 4, 2005
Ideas for sale - part 2
The International Herald Tribune is continuing its stories on intellectual property with U.S. plays it tough on copyright rules. This story describes the tensions created by the US's push to have the world adopt our IPR rules:
In the process of defending the lucrative exporting of American ideas and U.S. rules on who owns what and for how long, Washington seems prepared even to offend its allies.
In Australia, for example, the trade agreement that took effect on Jan. 1 has altered the prices and practices for prescription drugs. Experts say the full effect will take three to 10 years to emerge.
In essence, a country where the state determines the cost of drugs is now more beholden to protect the rights of U.S. pharmaceutical companies to drugs pioneered and patented in America.
Creative works that had passed into the public domain in Australia, like "Gone With the Wind," are now subject to U.S.-style copyright terms. The Music Council of Australia said the agreement seemed to "change Australian law to match United States law, possibly more for the benefit of the U.S. than Australia."
There is some irony in this situation. The US is pushing for a global one-size-fits-all standard. Yet, in the US, patent reform is stalled because it has become clear that the one-size-fits-all system doesn't work. The IPR needs of the bio-tech and pharmaceutical industries are different from that of the electronics and software industries.
The US is caught in some what of a dilemma here, arguably self created. One the one hand, US companies are losing billions in outright piracy and counterfeiting, which fuels the calls for tighter IPR. One the other hand, the US patent and copyright system is in danger of becoming so tight as to stifle creativity (it has been noted that if the existing copyright system were in place back when Walt Disney was getting started, all of the wonderful early Disney movies could not have been made because they would have violated copyrights of people like the Brothers Grimm). Thus, we are in danger of exporting our broken system in what maybe a misguided attempt to cash in on the I-Cubed Economy.
But, it is becoming clearer that the I-Cubed Economy is different from our industrial-age notions of the "royalty and licensing economy." Companies (and countries) are relying more and more on royalty income. But, as was noted in the earlier posting, companies who rely on yesterday's ideas will lose out in the race for the next innovation. Time-to-market of the innovation maybe more important that the downstream royalties.
An IPR system that focuses on downstream royalties to the detriment of time-to-market will not promote prosperity in the I-Cubed Economy; it will hinder the economy, to the disadvantage of all.
Posted by Ken Jarboe at 9:18 AM | Comments (0) | TrackBack
October 3, 2005
Ideas for sale
The International Herald Tribute is running two stories on patents and intellectual property rights. Yesterday, they ran the story Extracting gold from patents can bolster the bottom line. This was a description of how companies are using patent royalties to boost profits:
Compared with manufacturing, licensing promises lower risk and higher income. Thomson in 2004 kept 81 cents of every euro in licensing sales as profit, but only 10 cents of every euro from sales of broadcasting equipment and services.It does contain a warning:
Danny Rimer, a partner in London at Index Ventures, a fund company that has 750 million invested in technology companies, said businesses based solely on licensing had limited futures.
"Most entrepreneurs view IP as a defensive mechanism and not as an opportunity for creating a business," Rimer said. "Companies having the greatest challenges adapting to the new world are banking on exploiting IP weaknesses."
Today's story is A new battlefield: Ownership of ideas - Technology (also available running on the New York Times website as The Idea Economy: Battle Over Right to Sell Knowledge. It is a good discussion of the issues - pro and con. I think the article gets to the fundamental point:
The real problem is how to fashion a system that promotes innovation, not mere accumulation. If savvy entrepreneurs can manipulate the system by locking down valuable ideas, true pioneers will find it too tough to win rewards for their inventions.
We need an IPR system that protects financial incentives for innovation without creating barriers. Many of us feel that the current US balance is out of kilter - a point that was raise over and over again at our briefing on the subject last summer (see Is the US Patent System Endangering American Innovation? on the Athena Alliance website). Creating the right balance will be tricky: too little control results in the protections and incentives disappearing; too much control stifles innovations. But finding that balance is absolutely critical if the I-Cubed Economy is to flourish.
Posted by Ken Jarboe at 1:01 PM | Comments (0) | TrackBack