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June 29, 2006
Innovation in "low-tech"
Earlier this year, the Europeans finishing up an interesting project on Policy and Innovation in Low Tech - PILOT. Their final report was issued in January with the following conclusion:
Much growth and employment in OECD countries still emanate from LMT [low-tech and medium-low-tech] industries, and LMT companies are relevant sources of innovations in the economy.
Innovation policy can be more effective when it is based on a more comprehensive understanding of the relationship between R&D and innovation.
Innovativeness is based on a particular enabling configuration of resources that a company possesses rather than on excellence in R&D alone.
Organisation practices – knowledge management and personnel policy in particular – play a vital role for competitiveness and innovativeness of LMT companies
Network relations between companies and supportive social networks on a regional level are of great and growing importance as resources for firm capabilities.
Interrelationships of low-tech and high-tech sectors in an economy are of major importance for the innovativeness of industry in general.
The report takes on (head-on) the standard image of the knowledge society and intangible economy as simply an R&D/S&T economy:
In the movement towards a knowledge based society in the European Union, the competence to generate, use and absorb new knowledge is increasingly viewed as critical for economic success and societal development. Against this background, the conventional wisdom sees high-tech, research-intensive and science-based industries as the key drivers of future economic prosperity. Such industries are regarded as the main source of highly sophisticated products that are not easily imitated elsewhere and, therefore, the policy conclusion is that high-cost industrialised countries should concentrate their efforts on promoting these industries. In this scenario, non-research-intensive, so-called low-tech and medium-low-tech (LMT) industries are deemed to offer little to enhance prospects for future growth, and as a result, they receive less explicit political attention and support. LMT sectors comprise for the most part mature industries such as the manufacture of household appliances, the food industry, the paper and print industry, the wood and furniture industry, the manufacture of metal products or the manufacture of simple plastic products.
. . .
LMT industries in the OECD countries employ many more people than high-tech industries. Moreover, many firms in these industries are innovative and knowledge intensive without, by definition, engaging in R&D to any great extent. Thus, they provide a striking challenge to currently held notions about the sources of future industrial growth. Our analysis suggests that while new sectors emerge within the economy, and some sectors disappear, this does not account for the processes of growth which actually occur across the OECD. The growth trajectories of the advanced economies seem to rest as much on such sectors as engineering, food, wood products, and vehicles and so on, as they do on such sectors as ICT or biotech. Medium-low and low-tech industries have persisted over the past decades despite the claims that we are undergoing a kind of structural revolution.
. . .
These research findings show that growth is primarily based not on the creation of new sectors but on the internal transformation of sectors that already exist. Over-emphasising the role of high-tech activities ignores this major dimension of change in advanced economies. As a corollary, in order to ensure continued future growth prospects for advanced economies, policy-makers need to focus on the processes of innovation and creativity in firms in all sectors, not just high-tech firms.
The report is also extremely insightful as to metrics of innovation:
Our research results, as reported in Sections 3.1-3.5, suggest that as an alternative to – better: in addition to – R&D expenditures, analysts must use other indicators of innovativeness and of the general level of technology in an economy. Firms may be classified according to their
• R&D intensity
• Design intensity
• Technological intensity
• Skill intensity (human capital orientation)
• Innovation intensity
• Organisational innovativeness.
The basic assumption is that these indicators together will capture the bulk of creativity, explaining successful firms and industries and showing the variety in all economic sectors. Thus we argue that the adoption of a family of indicators rather than a composite indicator is a more appropriate way to improve on available taxonomies.
The policy conclusions are in striking contrast to the standard R&D framework:
The policy problem is, therefore, to support building innovation-enabling capabilities for these companies to access knowledge resources in a critical and selective way.
. . .
In spite of the difficult overall economic situation of low-tech and medium-low-tech industries and the challenges of globalisation and growing competition, the future prospects of many LMT sectors and companies are not bad or may even be bright, depending on some structural conditions. This holds true for companies whose specific competencies cannot easily be copied by potential competitors; for firms that are active in markets where geographical and social proximity is a competitive advantage; and finally for companies that are able to absorb distributed knowledge (be it scientific or of any other type) and to employ up-to-date process technologies systematically and efficiently.
These conditions are not given for all LMT companies, and it is likewise true that not all companies in Europe are able to develop in this direction or really use structural conditions of this type in a competitive way when they face them. But there is no reason to believe that LMT companies are, in principle, less likely to face the challenge than research-intensive firms are.
What separates successful companies from others in the long run is the ability to innovate. And innovativeness is by no means an issue only for those with a high R&D budget. Hence, non-discriminatory support of innovativeness is a major policy topic. Our research findings lead to a number of problems concerning innovation policy in the low-tech and medium-low-tech sectors. Several policy issues should be highlighted.
• First, there is little if any awareness of innovation-supporting policies other than focusing on R&D.
• Second, it is an important policy task to devise measures and to support activities which aim at improving the knowledge base and the capabilities of low-tech and medium-low-tech companies.
• Third, policies should focus on the development of firm capabilities to meet the demands of cross-company co-operation with corresponding channels of communication, gateways and personnel responsibilities.
• Fourth, policies should encourage both the generation of knowledge and its diffusion between low-tech and high-tech sectors, and they should also promote stronger interrelationships between the sectors.
These considerations should also lead to a new understanding of the restructuring of the economic landscape of Europe in the early years of the 21st century. This future does not appear to foretoken wholesale structural replacement of “old” sectors with “new” ones, or a substitution of “old” technologies with “new” ones, so much as a continually changing blend of technologies of various vintages. This process of change is evolving as a restructuring of sectoral and technological systems, transformed more from within than from without. It is not dominated by industrial activities for which competitive advantage, capability formation and economic change are generated by front line technological knowledge. Rather, it is dominated by what are often pejoratively termed low-tech and medium-low-tech industries. And it is unambiguously characterised by the continuous combination and re-combination of high and low-tech attributes.
The result of this research comes to the same conclusion that I have in my own informal look at the economy: in the knowledge society and intangible economy, what matters is what you do with the knowledge and intangibles. Future economic prosperity can not be based on the pure production of knowledge and intangibles. It must be based on their utilization throughout the economy.
And our current "innovation" policy fails to reflect this fact.
Posted by Ken Jarboe at 11:34 AM | Comments (0) | TrackBack
June 27, 2006
Maintaining a competitive advantage in the US
Business Week is running a story on 6 case studies on US companies who have faced the decision to outsource - with different outcomes: Here Or There? - Six entrepreneurs explain why they outsource -- or not.
What I found most interesting was the strategies of the 3 companies who chose to stay.
Adam Keller can't beat competitors who build birdcages in Asia. Instead, CagesByDesign.com, his Neenah (Wis.) company, creates custom cages that run from $300 to $2,000 for customers such as museums and amusement parks. "There are other products we could make, like the typical $39.95 birdcage you see at the pet store, but I won't even consider it," says Keller.
Brenda Lynn knows she could save money by having her Fairfield (Conn.) company's knitwear made in the Pacific Rim or South America. After all, most of her competitors do. But ever since Lynn sold her first hat to Barneys New York in 1991, she has stayed stateside. "Companies that outsource can offer retailers a similar product at a lower wholesale price, and that has hurt me at times," says Lynn. "But I retain a competitive advantage because of the desirability of my designs and our ability to maintain a higher level of quality."
Eric Poses has a list of reasons his two-person company, All Things Equal, makes its board games in Wisconsin. The first is a matter of principle. "If there were more companies like mine keeping business in the U.S., we could certainly have a positive impact on American labor," he says. The rest are all business. The factory that produces such games as Loaded Questions and Talent Show is a short flight from his Venice (Calif.) offices and offers free warehousing of his inventory. He pays one-third down before production but says many foreign producers demand half. And Poses can "produce and ship as much product as I need in 3 to 4 weeks, vs. 8 to 12 weeks with overseas production." Of course, there is a downside: Poses estimates he could save 30% going abroad.
The lessons:
High end customization.
Design and quality.
Close link between office, production and customer.
It sounds like the old story, compete on premium or on price. And the competitive location of premium production is different from commodity production. The trick for governments is to turn that old truth into an economic development strategy.
Posted by Ken Jarboe at 08:20 AM | Comments (1) | TrackBack
June 26, 2006
Supreme court - the next patent case
The Supreme Court continues its review of patents. From Reuters.com - US high court to review patent "obviousness" case:
The U.S. Supreme Court on Monday agreed to review an appeal of a key patent case that could set a standard for when an invention is too obvious to patent.
The high court said it would consider the appeal by KSR International Inc., a Canadian manufacturer of gasoline pedals for cars and light trucks, arguing that a patent held by a rival manufacturer is invalid because it is too obvious.
Patent lawyers have said the case could help clarify U.S. patent law, which requires inventions to be "non-obvious" in order to be patented.
At issue is what standard the courts should use to determine what inventions are obvious.
Patently-O: Patent Law Blog: Supreme Court: Time to Rethink Obviousness describes the case in more detail:
The Supreme Court has granted KSR’s writ of certiorari and now will address fundamental questions of patentability that have been raised. The doctrine of nonobviousness ensures that patent rights are not granted on inventions that are simply throw-away modifications of prior technology. Questions of obviousness are at play in virtually every patent case, in both proceedings before the USPTO and during infringement litigation.
Over the past twenty-five years, the Court of Appeals for the Federal Circuit has developed its nonobviousness doctrine using a motivation/suggestion/teaching test. According to the test, when various pieces of prior art each contain elements of an invention, the prior art can be combined together to invalidate a patent on the invention only when there is some motivation, suggestion, or teaching to combine the prior art.
KSR has asked the Supreme Court to rethink that approach and take a fresh look at the obviousness standard for patentability. The petition specifically questions whether obviousness should require any proof of some suggestion or motivation to combine prior art references.
For those interested, Patently-O has more on the case, including links to documents.
With patent reform legislation apparently bogged down in Congress, it looks like the Court has decided to take the lead on this critical issue.
Posted by Ken Jarboe at 02:46 PM | Comments (0) | TrackBack
IP and finance
One of the newest financial innovations (following on last week's posting on the history of mortgages) is the monetization of intangible assets (a topic I wrote of before). In just the past few weeks, there have been a number of stories about parts of this phenomenon. The Economist ran a piece - "Securitising intellectual property: Intangible opportunities" - based on Dunkin' Donuts recent sale of $1.7 billion in bonds back by its franchise royalties. As the story points out, use of a company's intangible assets can be a smart financial move.
Raising money this way can make sense not only for clever private-equity firms, but also for companies with low (or no) credit ratings that cannot easily tap the capital markets or with few tangible assets as collateral for bank loans. Some universities have joined in, too. Yale built a new medical complex with some of the roughly $100m it raised securitising patent royalties from Zerit, an anti-HIV drug.
The Yale example highlights the most common (and growing) part of this trend: securitization of patents. One of the masters of this "space" is the firm Ocean Tomo. A story in the July 2006 issue of Business 2.0 (not yet on line) describes the company’s range of patent related activities: A. Buy and sell patents for private parties; B. Devise an index of patent-rich stocks; C. Launch a website of classified ads from patent holders; D. Broker technology deals for major companies; E. Create funds that allow people to invest in patents; and F. Run the first-ever public auctions for patents.
Some of these are a work-in-progress. For example, the public auction didn't raise as much as was expected - in large measure because patent owners set their reserve prices higher than buyers were willing to pay. But the company quickly learned from that glitch and most of the patents were later sold in private sales. (For more on the patent auction, see Ocean Tomo Patent Auction - Payne.org Wiki.)
Another variation of this theme of patents for cash is the "idea-generation" firm of Intellectual Ventures (IV), which was recently highlighted in Business Week - ""Inside Nathan Myhrvold's Mysterious New Idea Machine". One of IV specialization is quick patenting of the ideas that come out of expert brainstorms:
Over the past three years, Intellectual Ventures has held about 70 brainstorming sessions. The result: 500 patent applications in areas including optics, biotechnology, robotics, e-commerce, and mobile networking.
But this presumptive patenting in is not all IV does:
Intellectual Ventures is not just a think tank where big brains sit around dreaming up ideas. It also has a second business, one that is generating controversy: buying patents. In fact, that's a much larger part of the operation. Maintaining secrecy through shell companies and nondisclosure agreements, often swooping in aggressively to seal deals, it has scooped up thousands of patents and is on the prowl for many more. That has many people in the tech world worried.
As a result, IV has become rather controversial:
With its vast hoard of patents, IV could turn out to be the world's biggest patent troll. It could have the power, at least in theory, to sue a vast swath of Corporate America, becoming a force that smothers rather than nurtures innovation. "There's just a lot of questions about all of these patents they have and what they are going to do with them," says Christina Schneider, a spokesperson for Hewlett-Packard Co., echoing concerns heard widely in Silicon Valley.
But IV sees itself as leading the new wave of innovation financing:
In response to charges that he is a predator, Myhrvold describes himself as an entrepreneurial financier, somebody who is devising new ways to fund innovation. He likens himself to the first generations of venture capitalists and private-equity investors, who were also widely vilified. Myhrvold believes that there is an emerging trend to treat intellectual property, and patents in particular, as an asset that people and companies will invest in, the same way they do in real estate or stocks. The result, he believes, will be a boon for invention, just as venture capital and private equity have stimulated enormous growth and innovation in the American economy. "I'm one of the first invention capitalists," he says.
. . .
Just as venture-capital firms took root in Silicon Valley 30 years ago, Myhrvold envisions an industry devoted to funding the earliest stage of the product-creation cycle. "Today invention is an area that people view as too illiquid, too uncertain, and too risky, so that nobody wants to invest in it," he says. "The world has shown that if you provide capital and expertise to an area that is starved for capital and expertise," then "really good things will happen."
Regardless of the controversy over IV's tactics, new financial models focused on intangible assets are here to stay. Yet, they face a number of hurtles before they are more widespread. As the IV story illustrates, creating a stable patent system is one, as is finding the right level of protection of these assets as intellectual property. [For the record, I am on the oppose side of IV on the patent fight].
There are also questions of how federal and state security regulations should be applied to these assets. Another is the problem of valuation. As the Economist noted:
It may be harder for investors to decide whether such deals are worth their while. They are, after all, highly complex and riskier than standard securitisations. The most obvious risk is that the investors cannot be sure that the assets will yield what borrowers promise: technology moves on, fashions change and the demand for sugary snacks may collapse. Valuing intellectual property—an exercise based on forecasting the timing and amount of future cashflows—is more art than science.
The valuation issue ties back to the question of how these intangibles should be accounted, the subject of an earlier Athena Alliance report. As a follow-up to that report, Athena Alliance has an ongoing project on the monetization of intangible assets to look at these issues from a public policy perspective. We hope to publish our report later this year.
Posted by Ken Jarboe at 08:35 AM | Comments (0) | TrackBack
June 24, 2006
A history lesson in financial innovation
A fascinating story in this morning's Washington Post about a house for sale in Arlington VA provides a great history lesson on financial innovation - "A House Built With a Milestone". The house in question was the first to qualify for a 10 percent down payment:
In some ways, the house is a direct product of the Great Depression. Before then, the federal government had followed a strict hands-off policy on housing, relying entirely on the private market to make loans and build. The system had worked pretty well, at least for the affluent, though it had its marked ups and downs during cyclical recessions, even some called "panics." Many people pioneered their land and built their homes themselves with the help of neighbors and relatives.
But real estate boomed in the 1920s, hitting a record construction level in 1925, as lending standards were loosened. Real estate agents told buyers that prices would rise forever, that they had never fallen. People bought the largest houses they could get, stretching to make the payments by using the three-year or five-year interest-only loans that were customary. Those loans cost less each month because borrowers didn't need to make any payments toward the principal on the loan.
Consumers felt confident they would be able to refinance at the end of the loan term, and lenders felt secure because on many of the loans, the debt represented only about 50 percent of the value. But what they overlooked was that many people had taken out other loans as well, sometimes two or three, to make up the difference between the primary loan and the purchase price. They had in fact financed their down payments.
"The system was full of holes," wrote Julian H. Zimmerman, commissioner of the Federal Housing Administration, in 1959, describing the housing market in the 1920s. "Juggling several mortgages was difficult even when the going was good; but when things got rough in the late '20s it became impossible."
Workers lost their jobs; then they lost their homes to the banks that held the loans. About one in six mortgages in America went into foreclosure. Even people who remained employed found they couldn't find buyers for their homes at any price. No lender wanted to refinance short-term loans now seen as risky. President Herbert Hoover watched the downward spiral with horror, immobilized.
Within a month after President Franklin Delano Roosevelt took office in 1933, the Home Owners Loan Corp. was established. The federal agency helped homeowners stave off foreclosure by refinancing about one-fifth of the nation's outstanding residential mortgages, all of them in default. The Home Owners Loan Corp. was successful and was liquidated later at a slight profit.
Amid a surplus of houses and a paucity of buyers, the real estate market languished. To stimulate the housing and lending industries and help renters and moderate-income people buy homes, the Roosevelt administration developed a new kind of insurance program that would cover the losses lenders suffered if homeowners defaulted on their loans. In June 1934, the National Housing Act was passed, creating the Federal Housing Administration loan insurance program. It permitted borrowers to purchase homes with 20 percent down, financed with low-interest, fixed-rate loans to be repaid over 20 years, with mortgages not to exceed $16,000. Adjusted for inflation, that would be a loan value of about $228,000 today. The government in effect promised lenders they would be reimbursed for any losses; home buyers paid a little extra money each month as insurance to cover that expense.
The system worked. The fixed-rate loan for a 20-year or 30-year period became the national standard.
The first house financed under the new FHA program was in New Jersey, and thousands more began cropping up across the nation. The financial losses to the program were so small -- only 35 houses were lost to foreclosure in its first three years, out of 229,300 mortgages insured -- that legislators decided to permit an FHA expansion to cover houses purchased with only 10 percent down payments, too.
That amended housing law was enacted in 1938, and the Arlington house was the first structure financed and built under the revised housing act. It was viewed as such an important event in the housing industry that the National Retail Lumber Dealers Association's members made touring the house a priority item for builders visiting the nation's capital for the group's annual conference in May 1938. Many built similar houses elsewhere.
The expansion of the FHA program had its critics. Real estate agent Charles E. Lane, chairman of a New York housing committee, told a Fifth Avenue business audience that he disapproved because the expansion would encourage people to buy homes who were not in a "proper economic position" to do so, according to the New York Times. His concerns were echoed by others, who called a 10 percent down payment "too narrow a margin of safety for the mortgagee," according to another Times article in 1938. But by May 1938, a record $96 million in mortgages were initiated in a single month, including about 40 percent that involved 10 percent down payment loans.
And, as the saying goes, the rest is history.
Ironically, as the story goes on to point out, the Arlington house is now on the market at a high enough price to not be eligible for FHA financing. To me, this illustrates how we continue to need innovation in housing. I'm not sure the recent financial innovations of interest only loans are the right way to attack the problem of affordable housing. The other innovation embodied in this house was its design. As a two bedroom rambler, it was meant to be the affordable option for the middle-class.
Maybe it is time to return to building for affordability. There are stories on the news about couples trying to unload their McMansions due to the high cost of operation and upkeep. As people attempt to downsize, there should be a great opportunity for new innovations in housing (and finance).
But to make the right policy decisions. As our history lesson shows, the government has a role to play in these innovations - and can either help or hinder depending on how it plays that role.
Posted by Ken Jarboe at 11:58 AM | Comments (0) | TrackBack
June 21, 2006
Work-life balance
As I mentioned in my earlier posting on leisure in the I-Cubed Economy, the balance between work and non-work activities is constantly shifting as the two blend and separate. A recent Economist special report on the "Work-life balance: Life beyond pay" underscores the driving force behind the issue:
To some extent, the proliferation of work-life-balance schemes is a function of today's labour market. Companies in knowledge-based industries worry about the shortage of skills and how they are going to persuade talented people to work for them.
Numerous people (Richard Florida, Dan Pink etc. etc.) have pointed out that creative and knowledge work is different from the traditional 9 to 5 industrial schedule. In many ways, it is more of a throwback to the agricultural era's farm-life where work and leisure were interrelated.
We still haven't figured out the best way to manage that integration. Nor have our labor force policies caught up with the shift. But as the Economist article describes, the bottom line is clear:
For some time to come, talented people in the West will demand more from employers, and clever employers will create new gewgaws to entice them to join. Those employers should note that for a growing number of these workers the most appealing gewgaw of all is the freedom to work as and when they please.
How we do that is the challenge of the I-Cubed Economy.
Posted by Ken Jarboe at 03:45 PM | Comments (0) | TrackBack
Separating the brand from the product
The retail giant Target is embarking on an interesting experiment of separating a brand from its underlying product -- what I would characterize as creating a pure intangible. Target is licensing its name and logo (the red bull's-eye) to be used on a line of chic clothing called Target Couture.
So what, you ask. Lots of retailers sell products under their own brand. Here is the difference: Target Couture isn't being sold at Target stores. It is only available at the boutique Intuition in Los Angeles, with plans to expand sales to other high-end boutiques and department stores.
Needless to say, this is causing a stir. According to a story in this morning's Washington Post -
Where Target Is Always 'Tar-zhay':
Not all Target shoppers are enamored with the concept, however. The Slave to Target blog, which features posts with subjects such as "where are you tara jarmon puff sleeve tee?" had this to say about the Target Couture line: "Target is a Sell Out though -- they are sellin' out to the fads and the faddiest store ever ... Intuition."
Michael J. Silverstein, a senior vice president with the Boston Consulting Group Inc., said he was skeptical of whether Target-branded merchandise would sell outside its stores. It may confuse customers, he said.
"People . . . would say, 'Well, why is that here?' They need an explanation," he said. "And in the world of consumer marketing, explanations cost money."
It remains to be seen whether the line will catch on, but it almost doesn't matter. The move is part of the retailer's efforts to hold onto the elusive and often ephemeral designation of "cool," according to Marshal Cohen, a senior analyst with consumer research firm NPD Group Inc. Target Couture allows the chain to elevate its brand beyond the walls of its big-box stores and into the glitzy arena of celebrity high fashion. Selling clothes is secondary.
"I think they'll be tickled pink -- or in their case, tickled red -- if they make money," Cohen said. "But I don't think they care about that. What they're most concerned about is maintaining the integrity of the brand."
We shall see. When the brand is divorced from the product, it becomes hard to maintain the brand's integrity. And its value become subject to the whims of fashion - not the underlying quality of the product.
An interesting experiment, indeed.
Posted by Ken Jarboe at 07:46 AM | Comments (0) | TrackBack
June 20, 2006
Countries moving up the value chain
Steven Pearlstein's column in Friday's Washington Post - “In West Cork, an Economy Made of Stout Stuff” - has a great line about the Irish economic “miracle”:
The thing you notice here is everyone seems to have gotten the economic strategy memo about “moving up the value chain” and decided to take it seriously. I don't just mean business executives and economists. I'm talking about undergraduates, call-center operators, cab drivers, bartenders, civil servants, union officials and university presidents. All of them realize that an economic boom based largely on cheap labor, tax breaks, knowledge of English and a backdoor into European markets can take you only so far. Now, with labor and land costs approaching Western European levels, tax incentives limited by new European Union rules, and India and Eastern Europe coming on fast, they know they need a second act.
The problem is that lots of other people have read the same memo. For example, the very next day, the Post ran a front page story about “In China, Dreams of Bright Ideas”:
Instead of millions of Chinese youths assembling somebody else's inventions, the party leadership has concluded, the time is right for China to come up with its own ideas and sell them to everyone else. The question of whether China can pull off this transformation -- from workshop of the world to cradle of invention -- is key to the giant country's future.
In a world where comparative advantage is created, not reliant on natural endowments that create advantage in wool versus wine (see Gomory-Baumol and Samuelson), everyone wants to move up the value chain.
But if everyone one does, no one does. As Michael Porter taught us a long time ago, you compete on either price or difference. It is just as important to differentiate where on the value chain a company or country can be competitive. The broad strategy of “innovation” on the national level is the same as every region wanting to be the next Silicon Valley. That leads to a strategy of flitting from semiconductors to biotech to nanotech to the next big thing.
A better alternative to this hyperactivity is to build on your jurisdictional advantage - to use Mary Ann Feldman's term (see her paper on the Athena Alliance website). Jurisdictional advantage (akin to Porter’s corporate competitive advantage) is build on existing local strengths. But just as companies refine, improve, expand and adapt their competencies, so must localities and countries.
This is what Ireland appears to be doing – not simply moving up the value chain in a generic fashion. They began by leveraging a well-educated, low-cost English-speaking workforce in an EU country to become the American platform for entry into Europe. Now they are looking to build on the competencies that they have created. As the Enterprise Ireland strategy for 2005-2007 states, part of their vision is:
Being strongly positioned in key niches both in the emerging technology-driven sectors such as applied software and life sciences, and in knowledge-intensive segments of longer established sectors such as consumer foods, where significant opportunities for growth exist.
For China, the game is different. They are so large that their jurisdictional advantage will shift from region to region (as it does in the US). It remains to be seen, however, whether the central government will allow the localities the autonomy and flexibility to pursue their unique advantages under a general national innovation and economic development rubric. If China tries to force feed all regions to follow the same exact strategy, their drive to innovation will falter. They will need to craft a strategy for hot spots in certain localities in certain areas.
After all, while “the world is flat” is a great metaphor for increased global competition, Richard Florida has shown that the world is actually spiky. Creating your own unique spike is what a locality's comparative advantage is all about.
Posted by Ken Jarboe at 08:05 AM | Comments (0) | TrackBack
June 19, 2006
Getting to know your customers
Apropos my previous posting on Wells Fargo's customer-focused retail approach comes this discussion by web design guru Gerry McGovern - The greatest skill of the 21st Century:
Technology invariably reduces the touch points between customer and organization, thus reducing the transaction cost. Up to a point, that's a good thing. Do you want to go to your local store, have limited choice, pay higher prices, but have a nice conversation with the check-out clerk? Or do you go to Wal-Mart?
The problem is that when you close down too many touch points, you blind yourself to what your customer needs.
. . .
In twelve years of working in 35 countries I have found an extraordinary lack of genuine customer focus among web teams. Technical and design skills abound, and content skills are on the increase. However, customer skills are rare.
I told a web team recently that they needed to develop a customer-focused culture. "Great!" was the reply. "Let's do a survey. I wonder who we could hire to do a survey for us?"
Hello? Outsourcing the understanding of your customer is not how you develop a customer-centric culture. You can outsource coding, design and writing if you want. You cannot outsource understanding your customer. It is the most important skill of the 21st Century.
Those who have a deep understanding of customer needs and behaviour, and translate these needs into effective websites will command high wages. Why? Because that's how you create value.
Get to know your customers. The more technological society becomes the more important is such knowledge.
The key is linking knowledge and technology. As many of us have been saying for some time - it is not a high-tech economy, it is a high-tech/high-touch economy. Information technology is only as a good as how you use it to put information to use. Gerry McGovern constantly applies that rule to website design. The same rule can and should be applied to all areas of technology/information policy.
Posted by Ken Jarboe at 01:49 PM | Comments (0) | TrackBack
Innovation in banking
The latest issue of Business 2.0 has an interview with Dick Kovacevich, CEO of Wells Fargo, about their innovative approach to banking - "Bank different". Their approach is to emphasize the retail. Branches are called stores and while others are scaling back on brick and mortar, Well Fargo is expanding:
Q: Branches - sorry, stores - are an expensive way to conduct transactions. Why are they still important?
A: Every transaction is an opportunity to engage a customer - both to satisfy a transactional need and also to sell him something. And the transaction actually gives you an understanding of customer needs or another new opportunity. If you come in and cash a check from Fidelity, one of our tellers or someone should ask "Could we introduce you to an investment consultant to see if we can do a better job for you than Fidelity?" and so on. So store traffic is good even though it can be more costly, because transactions give us an opportunity to understand and satisfy a customer's need, and therefore make new sales.
And I would just ask two rhetorical questions: Who over time have been the better merchandisers, retail stores or banks, in terms of their ability to attract customers and serve them well? Most people would say retailers have been more effective than banks. And I'd ask the second rhetorical question: How many retailers don't want customers in their stores?
Q: I've banked with Wells Fargo for a long time, and I remember when the branches were like mausoleums. Now they're buzzing. What are all those people doing?
A: Besides what you might call traditional bankers, you're seeing a mortgage consultant, an insurance agent, and brokers. We've also roughly doubled the number of bankers in our stores over the past four or five years.
But that doesn't mean that they are shying away from the Internet and new technology:
Q: You've recently introduced some new Internet-based tools, like a report that categorizes spending whether it's done through a checking account or credit card and scanners that let small businesses deposit checks electronically. Why don't we see that kind of innovation in banking more often?
A: You know, I started in business working at General Mills (Research). I don't think the banking industry is particularly at the leading edge. We probably learn more from other industries than we teach them. That's why I'm on the Target (Research) board. I think retailers are 20 years ahead of banks in their thinking.
Please don't tell your readers, but our checking accounts aren't really much different than Bank of America's (Research), OK? It's the way we distribute our products that's different. We have a lot more in common with other distributors of commodity products than we do with other banks. Most of the products that Target and Wal-Mart (Research) carry are similar, and the way you buy them is similar. Or take Home Depot. The products aren't what distinguishes Home Depot (Research); it's the way they put a plumbing store and a paint shop and so on under one roof.
And so we're doing that with financial services. We're taking what were commodity products delivered through multiple sales forces and putting them all under one roof so the consumer can come in and choose which products make sense. Before, you had to go to a banker, a broker, or an insurance agent for a CD, a mutual fund, or an annuity, and yet they were all trying to satisfy some sort of a long-term savings need. The risks and rewards are different, and you had to pay three different salespeople to bring those to you, and then you had to decide which one made sense because you figured the salespeople were all biased, right?
Now you can come to a Wells Fargo and we can talk to you about the costs and benefits of a mutual fund vs. a CD vs. an annuity and give you some advice - and we're agnostic because we're not just selling CDs. We can say "OK, what's best for you?" Other businesses have figured out how to do that in retail, and we have now figured out how to do it in banking. Eventually, maybe some of our competitors will too.
As this story illustrates, innovations in how products are delivered are just as important in differentiating a company as innovations in the products themselves. The power of these changes in business models and processes have been demonstrated over and over again as, for example, Southwest Airlines re-wrote the rules for airline routes, Federal Express created a new industry, and e-Bay made the flea-market the center of the Internet revolution.
As we set our national innovation policy, we need to keep in mind these innovations. And look to the laws and regulations that can help or hinder them. Well Fargo's all-in-one retail activity would not have been allowed under the regulations a few decades ago.
This is not to say that all regulations should be swept aside in the name of innovation. That is a formula for chaos not creative destruction. But innovation policy must look to a broad scope of areas to be successful - not concentrate on science and technology. Only with a broad vision can we see and understand where innovation is truly occurring in this I-Cubed Economy.
Posted by Ken Jarboe at 01:12 PM | Comments (0) | TrackBack
June 17, 2006
The decline of the image of America
The follow obituary was published in the most recent edition of The Economist -- Yasser Talal al-Zahrani
Yasser Talal al-Zahrani, a prisoner in Guantánamo, died on June 10th, aged 21
Nonthing much distinguished Yasser Talal al-Zahrani from the 500 or so other prisoners held by the Americans at Guantánamo Bay, in Cuba. In his loose-fitting orange clothes and flip-flops, he spent the long days sitting or lying in his wire-mesh cell. He washed with water from one bucket, made water in another.
Five times a day, when the call to prayer came over the camp PA system (sometimes overlaid, or garbled, with announcements in English), he would spread a towel on the cement floor and pray. At least it was not hard to determine Mecca's direction. The sun blazed in through the mesh and baked the roof of corrugated iron. If he left his cage to be escorted, in leg shackles, to interrogation or the hospital, humidity quickly soaked his shirts with sweat.
. . .
On June 10th, near midnight, he made his bed to look as if he was in it, wrote a suicide note, pushed a wad of cloth into his mouth, then hanged himself among the laundry drying from the ceiling. His colleagues did the same.
As he had hoped, his death led voices around the world to demand that the camp be closed. One senior American official, immovable, called his suicide “a good PR move”. She may have been right; Guantánamo, alas, remains wrong.
When a magazine such as the Economist feel compelled to make such a statement, something is very wrong. What is happening to that very important intangible asset: the American brand - the image of America? What ever happened to the "shining city on the hill" that Ronald Reagan talked about?
Posted by Ken Jarboe at 04:33 PM | Comments (2) | TrackBack
June 16, 2006
1st quarter 2006 current account
The quarterly current account data for the US came out this morning and the numbers were better than expected – specifically a rise in income payments. According to the BEA:
The balance on income shifted to a surplus of $1.9 billion in the first quarter from a deficit of $2.2 billion in the fourth.
Investment income Income receipts on U.S.-owned assets abroad increased to $140.1 billion from $130.4 billion. “Other” private receipts (which consists of interest and dividends) increased strongly, and direct investment receipts also increased.
Income payments on foreign-owned assets in the United States increased to $136.6 billion from $131.0 billion. A strong increase in “other” private payments (which consists of interest and dividends) and an increase in U.S. Government payments (which consists of interest) more than offset a decrease in direct investment payments.
From the point of view of our pure intangibles trade, there was nothing new in the report – since royalties and business services are already reported monthly as part of the trade figures.
The rise income payments did spark a minor renewal of the dark matter debate. Brad Selzer re-iterated is view that the dark matter thesis doesn’t hold up:
But the big gains came from foreign direct investment. The earnings of US firms abroad increased by $2.6b in the first quarter (v. q4). But even more importantly, the earnings for foreign firms fell by $3.7b. The net swing was $6.3b or so -- overwhelming the US interest bill.Dark matter (though not from Disney)?
Continued gains from the export of US intangibles (just not by Disney)?
Or bad data?
Mike Mandel touted the "Return of Dark Matter":
What a nice surprise this morning. I looked at the latest current account data, and discovered, lo and behold, that in the first quarter the U.S. earned more money on its foreign investments than foreigners earned on their investments in the U.S.Not bad for the world's biggest debtor, eh?
As those of you who have been reading this blog know, I take Brad’s side on this.
Sorry, Mike, but I didn’t hear your talk about the $2.2 billion income deficit in the 4th quarter. And simply asserting that the greater inflow of income over the outflow of payments is due to some mysterious “dark matter” doesn’t make it so. There are just too many more plausible explanations for this occurrence.
I agree that our data is bad and we don’t really have a handle on the flow and the values of intangibles. But we can’t wish away our huge current account deficit and our grow indebtedness on some dark matter.
Posted by Ken Jarboe at 04:19 PM | Comments (0) | TrackBack
McCain almost gets it
On Monday, Senator John McCain gave a major economic speech to the Economic Club of New York. While the speech focused on the standard macroeconomic issues of the Federal budget and trade issues, there were a few lines at the end that really caught my eye:
My friends, in the course of my lifetime our economy has undergone unbelievable changes. When I was a kid, our economy grew by producing more and more of the same. We now have an “ideas economy” where growth comes from making new things, not larger quantities of the old things.
If you walked into my house when I was twenty years old, my parents would have proudly displayed the same appliances they had when I was ten years old. Today I walk into my own house and am awestruck by the marvels my family uses – flash drives, Ipods and Tivos, things we never could have dreamed of, have become part of our every day lives.
Close, but not quite. Senator McCain, like most of Washington, is still thinking of innovation and ideas as making new things -- not as solving problems better and doing things in new ways. In this I-Cubed Economy where much of our innovation comes in the services and intangible goods area, the focus on "new things" misses the point. Unfortunately, this gadget mentality still plagues our policy debates.
However, I am extremely heartened by the Senator's understanding of how the economy has changed. And I do heartily agree with him when he stated, "as our economy has changed, too often, Washington has not kept pace." I may not agree with some of his solutions - which imply that all we have to do is get government out of the way. But that is the debate we should be having. Hopefully the Senator's remarks will help start that debate.
Posted by Ken Jarboe at 10:19 AM | Comments (0) | TrackBack
June 14, 2006
Design thinking
MIT has posted a great lecture by Tim Brown, the CEO of IDEO entitled "Innovation Through Design Thinking":
Not so long ago, Tim Brown recounts, designers belonged to a “priesthood.” Given an assignment, a designer would disappear into a back room, “bring the result out under a black sheet and present it to the client.” Brown and his colleagues at IDEO, the company that brought us the first Apple Macintosh mouse, couldn’t have traveled farther from this notion.
At IDEO, a “design thinker” must not only be intensely collaborative, but “empathic, as well as have a craft to making things real in the world.” Since design flavors virtually all of our experiences, from products to services to spaces, a design thinker must explore a “landscape of innovation” that has to do with people, their needs, technology and business. Brown dips into three central “buckets” in the process of creating a new design: inspiration, ideation and implementation.
Design thinkers must set out like anthropologists or psychologists, investigating how people experience the world emotionally and cognitively. While designing a new hospital, IDEO staff stretched out on a gurney to see what the emergency room experience felt like. “You see 20 minutes of ceiling tiles,” says Brown, and realize the “most important thing is telling people what’s going on.” In a completely different venue, IDEO visited a NASCAR pit crew to come up with a more effective design for operating theaters.
After inspiration comes “building to think:” often a hundred prototypes created quickly, both to test the design and to create stakeholders in the process. Says Brown, “So many good ideas fail to make it out to market because they couldn’t navigate through the system.” IDEO counts on storytelling to develop and express its ideas, and to buy key players into the concept. Finally, IDEO relies on constantly refreshing its sources of inspiration by bringing in bold thinkers to campus, and increasingly, focusing on socially oriented design problems.
As the The Business Innovation Insider describes it:
Tim Brown of IDEO explains the relationship between design thinking and innovation. According to Brown, design is everywhere around us - on the covers of business magazines, as part of consumer experiences at companies like Nike and Apple, and increasingly mentioned by Fortune 500 executives as an important way to grow a business. For many companies, design thinking is a way to create the future.
Exactly - and if design thinking is the way that companies are going to create the future, shouldn't our economic policy take that into account?
By the way, that is why Athena Alliance and the Congressional Economic Leadership Institute are hosting a Congressional luncheon on Design and Innovation today. A summary of the event will be posted later on the Athena website.
Posted by Ken Jarboe at 07:18 AM | Comments (0) | TrackBack
June 12, 2006
All about design
Want to know more about how design can make business better? Check out the UK Design Council's website. It is full of great stories, including a design case study on how a French company, Calor, teamed up with London-based product designers to create a new steam iron - the Tefal Aquaspeed - that is running away from the competition. This case illustrated how design and innovation isn't just about high-tech products like the iPod, but also for what we normally think of as rather mundane products.
These are perfect example of how design is not just about being "cool" but about being competitive. If we are to stay economically competitive, we need to learn from these examples of how to exploit our intangibles assets of innovation and design to help all sectors of the economy - not just so-called "high-tech". Only by infusing these assets into our entire manufacturing base will we reverse the trade deficit and ensure a sustainable economy.
Posted by Ken Jarboe at 08:24 AM | Comments (0) | TrackBack
June 09, 2006
Champions of Innovation
Business Week has just released its 25 Champions Of Innovation:
Let's welcome the Champions of Innovation. In an era when Six Sigma controls no longer guarantee competitive advantage, when outsourcing to China and India is universal, when creeping commoditization of products, services, and information hammers prices, innovation is the new currency of competition. It is the key to organic growth, the lever to widen profit margins, the Holy Grail of 21st century business.
Amen to that!. Now if we could only get our public policy in line with this new reality. For example, as BW points out:
They are different from others before them, polymath in skill (think an entire multidisciplinary team in one person), "bipolar" in thinking (using both the left and right brain in framing problems), and eclectic in education (dual math and art majors, English lit and MBA degrees).
So, where are the education programs in the current competitiveness bills to foster the next generation of these Masters of Innovation?
Posted by Ken Jarboe at 01:11 PM | Comments (0) | TrackBack
April trade in intangibles
This morning's BEA trade data was not good. The overall trade deficit increased by $1.6 billion to $63.4 billion - due to a decline in export and an increase in imports. As the Wall Street Journal put it:
The U.S. trade deficit resumed rising in April after two months of rare declines, pushed higher by surging oil prices, auto imports and a flood of furniture, televisions and toys from China.
However, the data shows our intangibles trade surplus holding steady at $7.9 billion. Increased receipts (exports) of royalties were offset by a decline in exports of business services, increased imports of business services and increased payments (imports) of royalties.
This month's trade data also includes revisions of services trade data going back to 1997. The revisions show more volatility in the monthly intangibles trade data, especially in 2003 and 2004. It also shows a slightly higher level of the balance than previously reported - with the peak being a surplus of $8.2 billion in November of 2005 rather than $7.5 billion in December 2004. But we see generally the same trend as before with a slow, relatively steady increase in both intangible imports and exports resulting in a relatively stable surplus.
Obviously, this stable surplus is good news - but not good enough to offset our huge deficit in tangible goods. Unless we address that deficit, we will not even begin to bring our international balance of payment in to a reasonable alignment.
There was also some good news in that the deficit in Advanced Technology Products declined in April after surging in March. The decline was due mainly to lower imports of information & communications, life sciences and opto-electronics, but partly offset reduced exports in aerospace.
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 09:35 AM | Comments (0) | TrackBack
June 08, 2006
How much leisure in the I-Cubed Economy
Just because work is moving from the tangible/physical to the intangible/information doesn't necessarily mean that our leisure time is increasing. In fact, while average work hours have declined by traditional measures, leisure has not increased -- as the blog
New Economist: Long-run trends in working time and leisure points out:
Over the past century there has been a large decline in average hours worked in what are today's advanced industrialised countries. Two recent papers have looked at the issue. The first, and best known, is the new NBER working paper by Valerie A. Ramey and Neville Francis: A Century of Work and Leisure. The paper found that much of the decline in US working hours has been offset by more in education:
Has leisure increased over the last century? Standard measures of hours worked suggest that it has. In this paper, we develop a comprehensive measure of non-leisure hours that includes market work, home production, commuting and schooling for the last 105 years. We also present empirical and theoretical arguments for a definition of “per capita” that encompasses the entire population.
The new measures reveal a number of interesting 20th Century trends. First, 70 percent of the decline in hours worked has been offset by an increase in hours spent in school. Second, contrary to conventional wisdom, average hours spent in home production are actually slightly higher now than they were in the early part of the 20th Century. Finally, leisure per capita is approximately the same now as it was in 1900.
So, leisure remains the same. On-the-job work declines but education - which is key input to those on-the-job - makes up for much of that decline. And we do more household work -- which tracks with the occupational changes over the past 100 years, where household servants were one of largest occupation categories in 1900.
That sounds about right. Although, I wonder about the trend some see toward mixing categories, especially where leisure and work activities blend. Creative and information jobs, I would think, are especially prone to that blending. So, maybe we need a new definitions and measures of leisure and work in the I-Cubed Economy -- just as we need new definitions and measures of a lot of things.
Posted by Ken Jarboe at 12:19 PM | Comments (0) | TrackBack
National Design Award 2006
Design isn't just about looking pretty or cool. For some, it is also about social responsibility. On Monday, the Smithsonian's Cooper-Hewitt National Design Museum announced that Nike will be given a corporate achievement National Design Award for more than just cool underscores that point. But it may not be sending the right message regarding the role of design in corporate competitive strategy.
According to the Cooper-Hewitt:
The National Design Awards were conceived in 1997 by the Smithsonian’s Cooper-Hewitt, National Design Museum to honor the best in American design. First launched at the White House in 2000 as an official project of the White House Millennium Council, the annual Awards program celebrates design in various disciplines as a vital humanistic tool in shaping the world, and seeks to increase national awareness of design by educating the public and promoting excellence, innovation, and lasting achievement.
This year's award, as the Washington Post puts it, Cooper-Hewitt Honors Nike For Just Doing It Right:
Jury spokesman Roger Mandle, president of the Rhode Island School of Design, says the panel was impressed with how Nike has moved beyond the taint of overseas sweatshop scandals.
"Corporate philosophy was a major issue for us," Mandle said by phone this week. "Beyond the extraordinary design quality and thinking on product development, it was their responsibility in manufacturing and attention to human resource issues."
. . .
"The jury is reflecting the state of design concerns today," Mandle said. "They are looking at the broader perspective. It's not just about cool design -- it's the overall responsibility of the designer or company."
This is not the first time that the corporate achievement National Design Award was given for broader goals. Last Oct, it was Patagonia, who was cited for its social consciousness as well
Cooper Hewitt: National Design Awards 2005
The 2005 Corporate Achievement Award is presented to Patagonia, a sports apparel company based in Ventura, CA, whose commitment to innovation, design, and performance is matched by its devotion to environmental and social causes. Founded in 1973, the company creates high-quality outdoor sportswear for mountaineering, skiing, and extreme sports, with a focus on functionality. Patagonia works with manufacturers to develop new fabrics such as Capilene and H2No Strom which meet athletes' strict performance demands, and also implements numerous environmental initiatives, including producing clothes out of soda bottles, recycling scraps even before they hit the cutting room floor, and harnessing wind for fuel.
Not everyone is happy with how the awards are going. Last October, when the 2005 awards were announced, Business Week's design guru Bruce Nussbaum posted the following on his blog: The National Design Awards are a failure.
Cooper-Hewitt just announced the winners of its Sixth Annual National Design Awards and it's really time to say out loud what so many design and innovation professionals have been saying for so long--the contest doesn't work. The winners are all wonderful designers who have done excellent work. But they are obvious choices. Most appear to be recipients of life-time achievement awards, which is really what the National Design Awards has mostly become.
What is wrong. I think design has quickly evolved far from the original conceit of the awards program. Just giving attention to great designers is really beside the point today. The great struggle for respect in society and in the corporate world is over. Design has won. It doesn't have to sell itself. It does have to prove itself, however. Design has to create better methodologies, better processes and better results for the people who use it. And design contests have to reward this ongoing effort, not simply recognize those in the past who have achieved greatness.
[One disturbing indicator of all this is the announcement garnered almost zero press coverage. The Post– which actually published its story days before the announcement – was only newspaper to pick up on the announcement (at least according to my Google news search).]
I would go one step further. I'm not sure that giving a design achievement to companies for their social responsibility sends the right message. Companies should be rewarded for social responsibility - both with awards and where it really matters: in the marketplace. But I worry that equating design with social responsibility takes away from both activities. Either it says design is all about social responsibility -- which is a very limiting message and cheapens the role of design in company strategy and operations. Or is it is about the design community patting itself on the back for being such good people -- which cheapens the importance of environmental and social responsibility.
In all fairness, the award to Nike is not just about being a responsible company. It would never have even been considered if it was not for its ongoing commitment to design and innovation as a core strategic principle. But the design award should be to companies for those criteria - not some other criteria however laudable.
I would rather have my friends over at the Calvert Group's Socially Responsible Investing section tell me how a company is doing on that criteria. After all, they are the experts. The design jury at the Cooper-Hewitt is not.
[Interestingly, all of the companies that are designated as Calvert Leaders are also innovative and design-intensive: Applied Materials, Colgate-Palmolive, Dell, Intel, Microsoft, Procter & Gamble, and Texas Instruments.]
As Roger Martin, of the Rotman School of Business at Toronto, keeps reminding us, we need to embed design in to corporate activity, not just added it on to the traditional firm. Nike may very well be an example of a company that does that. Its history of innovation and design excellence are proof that it is doing something right – and therefore deserves recognition such as with the National Design Award.
But the Award should be given for embedding the design process into the company – not of other factors. After all, isn’t one element of good design its clean focus, without all the extras?
Posted by Ken Jarboe at 08:50 AM | Comments (0) | TrackBack
June 07, 2006
Marketing an intangible capability
One of the difficulties of understanding the Intangible Economy is that even the description of intangibles is rather (pardon the pun) intangible. Intangibles run from worker skills and know-how and informal relationships that feed creativity and new ideas to formal intellectual property and brand names. The term is often used narrowly only to describe these latter “hard” intangibles, which are often also categorized (along with software) as intangible goods. The former set of intangibles – worker know-how, relationships, tacit knowledge – is some times referred to as intangible competencies. (See the Athena Alliance paper Reporting Intangibles: Lessons from the US Experience for a more in-depth discussion.)
Intangibles are used both internally in a company (as part of the production process) and marketed externally. The business model for marketing/selling intangible goods outside the company is well known: licensing, royalties, etc. Marketing intangible competencies is another matter – especially if that intangible was developed for internal use (e.g. a better production process) rather than specifically as an external product (e.g. a specific set of skills to sell to a client).
It can be done, however. Steven Pearlstein's column in this morning's Washington Post has a perfect example - “GE's Wealth of Free Advice”. As Pearlstein relates, GE has been giving away free consulting services on its legendary Six Sigma process, especially to companies who borrow money from their financing arm:
For the $15 million that Six Sigma costs a year, GE Commercial Finance buys a ton of customer loyalty and sets itself apart in what is otherwise a commodity-service business. Perhaps even more important, the program increases the odds that the mid-size firms to which GE is lending money will not only stay in business long enough to pay back the loans, but will be more likely to grow in the future -- as will their need for capital. "We know instinctively that the benefits to us are substantial," said Sharon Garavel, who heads up the program. "Our customers have told us that they intend to give us a larger share of their business." By her reckoning, it has already generated 350,000 hours of free consulting services to more than 3,000 customers since 2002, saving them collectively more than $1.2 billion.
In fact, under chief executive Jeffrey Immelt, who started offering Six Sigma assistance to customers when he ran GE's medical equipment division, all of General Electric's units have an "At the Customer, for the Customer" program. It is a brilliant example of how a company has taken an internal skill -- in this case, change management and continuous improvement, for which it is world-renowned -- and turned it into a marketable product.
Exactly – turning an internal intangible competency into an external intangible good. But with a very important twist: it is not marketed as a separate product, like licensing out a non-core technology. This model links the intangible directly back to the core product. In other words, GE Commercial Capital is not going into the Six Sigma consulting business. They are using this intangible asset to enhance its core business of lending money.
Smart – very smart.
Posted by Ken Jarboe at 08:46 AM | Comments (0) | TrackBack
June 05, 2006
Copyright critique - from the right
The Stanford Review is proudly conservative in its views, which makes this article on copyright - "Promoting Science and Useful Arts: The Growth of Copyright Since 1976" - that much more interesting. Written by its Managing Editor, Omkar Muralidharan, the conclusions are not what you would necessarily expect:
As Lessig argues, copyright is robbing culture of its lifeblood—collaboration. Truly vibrant culture requires the freedom to build on, modify, and borrow from others’ work. Copyright makes this process difficult, if not impossible. The creator must apply for permission to use each recognizable source of inspiration, and must change his or her work if denied. Copyright expansion is pushing us toward a sterile, lifeless “culture” where everyone pretends to work in isolation, afraid that others will hurl accusations of theft and sue for damages.
Is this necessarily our future? The economic factors that have driven copyright expansion show little sign of abating, but for the first time, there is hope on the cultural front. The development and spread of easy media creation tools means more and more people are running into copyright barriers, while peer-to-peer networks and other sharing technologies mean vast numbers of people infringe copyright frequently. All this means copyright law is beginning to be critically examined, despite the strong trend toward ever more restrictive laws. This combination of factors is pushing us toward a critical point—the future of copyright will be determined relatively soon. Only time will tell if we will choose a rich culture where people share freely, or a poor one where everything is owned.
The cultural argument that the article advances is an interesting one. But ultimately it is a subset of the economic argument. In an information/knowledge driven economy, the creative isolation that Muralidharan fears due to restrictive IPR is formula for economic stagnation - not just sterile culture. Information and knowledge need to be shared in order to be utilized and expanded. Overly restrictive controls on information are like shutting off the water supply to agricultural crops -- insuring nothing grows. While that may be in the interest of certain information holders -- insuring that competitors don't grow by withholding information -- such a tactic is detrimental to the economy as a whole and will eventually backfire on the practitioner as their creative growth dries up as well. As has been stated over and over again, balance between users and producers of information is key. And the current system is out of balance.
I'm not sure that I agree with the article's statement that the future of copyright will be determined relatively soon. I think that this is an ongoing process of constantly re-balancing. Right now, that re-balancing is sorely overdue.
Posted by Ken Jarboe at 08:54 AM | Comments (0) | TrackBack
June 02, 2006
May employment
Quick take on the May employment numbers:
Employment growth was flat - increase of only 75,000 new jobs - while the unemployment rate actually dipped a 0.1% to 4.6%.
Financial services continued to gain (up 12,600), as did the professional and business services (up 27,000), mostly in the computer systems design area (up 11,200). However, the information service sector lost 13,000.
Health and education services also continued to gain (up 41,000).
Food services and drinking places continued to gain (up 9,000) while arts, entertainment and recreation lost slightly (down 2,800).
Manufacturing decreased by 14,000 with declines in both durable and non-durable goods (durable goods production workers were actually up while non-durable goods production workers dropped significantly). The auto sector continues to be the most volatile.
Once again, big loser was retail trade - down over 27,000 (after dropping by 36,000 last month).
Generally, bad news for the economy - but some sliver of good news in the high-end services jobs.
Posted by Ken Jarboe at 08:36 AM | Comments (0) | TrackBack
June 01, 2006
Issues for the new Treasury Secretary
Most of the press (and the blogs) have been focusing on the macro-economic challenges that the new Treasury Secretary will face. The chatter has been on the trade deficit, the current account deficit, the budget deficit - and the impact of those deficits on the value of the dollar, the stock markets and the bond markets.
But yesterday's Wall Street Journal pointed out another economic issue that will confront the Secretary in his role as the Administration's lead economic policymaker - "Bush's Competitiveness Agenda Is Tested":
Henry Paulson accepted his nomination as Treasury secretary by highlighting the need for the nation to stay competitive. But one of his first challenges will be guiding President Bush's ballyhooed competitiveness agenda out of choppy waters on Capitol Hill.
The initiative, launched at the beginning of the year, started out with wide support among senior Democrats and Republicans in Congress. As the election year progresses, key planks face an uncertain future.
A proposal to renew the now-expired research-and-development tax credit, the keystone of the plan, was blocked from the tax-cut package that Republican leaders sent to the White House a few weeks ago. Instead, they promised the provision would be folded into a "trailer" bill later in the year. A plan to allow more highly skilled foreign workers into the country is in limbo, part of the deadlock over immigration. And with fiscal conservatives demanding curbs on spending, the outlook for proposals to increase spending on basic science research as well as math and science education is unclear.
"Two months ago, it looked like this was a slam dunk. Now it's bogged down," says John Hassell, Hewlett-Packard Co.'s director of federal-government relations, who is working to build momentum for the plan. "We're in an election year, and it's very easy for the headlines of the moment to push this off the front page."
. . .
Under Mr. Bush's proposal, about two-thirds of the $136 billion would go toward making permanent the R&D tax credit, a now-expired program that encourages firms to invest in cutting-edge research. "If you're not sure the tax thing is going to be around, you may not want to invest," Mr. Bush said recently, explaining the reasoning behind making the credit permanent. Amid budget pressures, Congress appears likely to revive the credit for a year, or perhaps two, when lawmakers get around to the second tax bill.
The balance of the Bush competitiveness program is designed to increase government spending on targeted priorities. The biggest beneficiaries: basic scientific research and mathematics-and-science education for high-school and younger students. Among other things, the Bush plan proposes to increase next year's spending by 9.3% for the National Science Foundation, the Department of Energy's Office of Science and the Commerce Department's National Institute of Standards and Technologies, a step toward doubling their budgets during the next decade.
Last week, the House approved a spending bill that would bump up funding for research supported by the Energy Department's Office of Science, carrying forward one plank of the Bush plan. The other science proposals have yet to be fully aired in the House, and fights may break out over the remaining requests. Mr. Bush's education proposals -- designed to increase teacher training and widen student interest in math and science -- appear to be in the greatest peril.
With the election looming, conservative House Republicans are showing little fealty to the White House on fiscal issues. Texas Republican Jeb Hensarling, a leader among House conservatives, says the government has more than 200 programs designed to promote math-and-science education. "Is the 208th program going to be the one that gets the job done? I have my doubts," he says, predicting a fight on the House floor. "Most House conservatives are going to be very reluctant to put their imprimatur on a new program."
I've been following this legislation closely, and it is clearly not a slam-dunk. It will take continued push from the White House and the House and Senate leadership. As the article notes, there is a strong conservative element that will fight against any new programs or funding - in both chambers. Already on the Senate side, the Senate Commerce Committee striped out a number of innovative new programs from their portion of the package. Among the provisions dropped was a small pilot program to help Manufacturing Extension Partnership (MEP) Centers develop new programs to help small manufacturers become more innovative -- to go beyond the current focus of the program to help small manufacturers with new process technologies.
At a time when continued American prosperity relies on the creativity and innovation, I really don't understand the objection to moving our premier business assistance program - MEP - into the 21st Century. MEP was a successful part of our meeting the competitive challenge of the 1980s - with its focus on new manufacturing techniques and processes. It can be an important factor in meeting today's competitiveness challenges - of creativity, innovation and design. But Congress needs to support this new direction - not hinder it with the cry of "no new programs."
We support innovation in the economy. Why can't we support innovation in economic policy as well?
Posted by Ken Jarboe at 08:16 AM | Comments (0) | TrackBack