September 2010 Archives

Technology innovation awards -- and beyond

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Today, the Wall Street Journal published the winners of its Technology Innovation Awards.

[One pet peeve: unfortunately, the shorthand version they use for these awards is just "innovation" -- which continues the misplaced notion the innovation = technology and only technology.]

While the title was "technology innovation," at least one winner was more about a business method than a technology. The e-commerce division winner was Receivables Exchange LLC, based on its online marketplace for small businesses receivables:

Receivables Exchange aims to make it much easier for a company to tap the cash locked in its receivables. A company posts its unpaid invoices on the exchange, which screens the seller to make sure it has a certain minimum revenue and has been in business for at least two years. The screening can be completed within 24 hours and the invoices can be posted the next day. Bidders offer to buy some or all of the posted receivables, and the exchange takes commissions from the buyer and seller.
Not a new technology-- but the application of existing technology to a new market.

Maybe next year they can expand the categories or the nature of the award itself into a real "innovation" award -- covering all the aspects of innovation.

Branding U

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Every university has its own identity -- as any proud alumnus will tell you. And the universities carefully market that brand -- just look at the "identity ad" from each of the opposing schools on every televised collegiate sporting event. Here's a quirky new effort in University branding - from today's Washington Post (American University, now home to the 'American Wonk'):

New York has financiers. Las Vegas has gamblers, and Austin has slackers.

Washington? Washington has wonks.

That's the inspiration behind a new American University effort to distinguish itself among a crowd of local colleges competing for attention by branding the campus as the home of the "American Wonk."

The school has handed out 3,500 free T-shirts imprinted with 18 slogans, including "Legal Wonk" and "Arts Wonk." Ads have begun appearing at Metro stops and in local newspapers. And during alumni weekend in October, there will be a "Wonk of Fame" exhibit.

Now, every school in the DC area touts its connection with the policy world. But it seems that they all also try to maintain a broader brand. It will be interesting to see how the other schools react (if at all) to this very target attempt to corner the "wonk" brand.

As a self-proclaimed wonk, I may have to get one of those t-shirts. And add the University of Michigan logo (Go Blue)!

Is "design thinking" about design?

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Yesterday's posting illustrated the design process from the 1960's. My point in posting this was to highlight the range of skills involved. However, there is another point: the process itself.

The example given followed a very linear process - ideation, prototyping, consumer testing of final options. The same exact process is the standard linear model of innovation.

There is a different process however called design thinking. As I noted in a posting a number of years ago:

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 [Tim] Brown [CEO of the design firm IDEO], 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.

Wikipedia uses this definition:

Design Thinking is a process for practical, creative resolution of problems or issues that looks for an improved future result. It is the essential ability to combine empathy, creativity and rationality to meet user needs and drive business success. Unlike analytical thinking, design thinking is a creative process based around the "building up" of ideas. There are no judgments early on in design thinking. This eliminates the fear of failure and encourages maximum input and participation in the ideation and prototype phases. Outside the box thinking is encouraged in these earlier processes since this can often lead to creative solutions.

Key to the process is involving the client in the design process - which is made possible by rapid-prototyping. As the Deputy Chief Executive of the UK Design Council (Trust me, I'm a Designer: How Design Research Can Influence Businesses, Governments and Policy Makers?) put it:

More and more business leaders and policy makers also see design as a strategic business process that helps to identify and meet real user needs.

However, designers are still ambivalent about "design thinking." Last March, the Economist held its Big Think 2010: Rediscovering imagination: competing on ideas. Core 77 -- a major design magazine -- posted the following musings on the meeting, Design thinking: Everywhere and Nowhere, Reflections on The Big Re-think:

There's something odd going on when business and political leaders flatter design with potentially holding the key to such big and pressing problems, and the design community looks the other way.

To understand this paradox, we need to look back at why business and political leaders have become so enamoured with design, and why so many designers struggle with the concept of Design Thinking.

Unfortunately, their exploration of the question was all about what makes good design -- rather than the process. From my point of view, I think the discussion of "design thinking" has terminally confused two concepts: 1) how good design creates a competitive advantage - i.e. the iPod, and 2) how the process developed by designers of can be utilized to improve innovation.

We need a way to separate out the concepts. The Core 77 blog posting ended with this: "How does thoughtful design sound?" For the good design part of the discussion, I agree. But what about the process part? Since "design thinking" keeps falling back into the "design" part of the phrase, how about a stress on the "thinking" part? Maybe "creative thinking"? But that doesn't quite sound right either.

Any suggestions?

[For more on this see Roger Martin's essay last year in BusinessWeek, The Design of Business.]

The range of intangible intensive work

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One of the important features of the I-Cubed Economy is its range of skill-intensive activities. It is not just a bunch of folks thinking great thoughts or the classic BOGSAT (bunch of guys sitting around a table) -- although there is some of that.

Here is a wonderful example from the early 1960's:

Design story: The Decanter from Landor Associates on Vimeo.

What strikes me about this story is not just the "high-end" intangible work -- the original design and the back end consumer testing. The tacit knowledge and skill level of the model makers is quite outstanding. The prototypes are not mass produced, machine made goods but carefully crafted one of a kind objects.

Thanks to Tim Brown's blog Design Thinking for info on this.

HP & Oracle case: follow the money

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Litigation over intangible assets -- especially proprietary information and IP -- is a fact of corporate life. But sometimes it is hard to know if intangibles are really the issue or just the pretext. A perfect example was yesterday's settlement of the HP - Oracle case on Mark Hurd. As you may remember, HP sued Oracle and Hurd when Hurd (former HP CEO) took a top job at Oracle. HP claimed that Hurd would bring valuable proprietary information over to Oracle.

According to the New York Times:

in a filing with the Securities and Exchange Commission on Monday, H.P. said it had modified its separation agreement with Mr. Hurd. He effectively waived about half the compensation owed him. Mr. Hurd agreed to give up his rights to the 330,177 performance-based restricted stock units granted to him on Jan. 17, 2008, and to the 15,853 time-based restricted stock units granted on Dec. 11, 2009.

Was it all just about the money -- punishing Hurd by forcing him to give back some of his severance? Or was HP really interested in guarding their intangible assets? Or some combination - where the size of the give back was calculated to the potential damage?

We will probably never know. But my guess is that given the difficulty HP probably would have had pursuing the case, the protection of intangibles was secondary to the money.

More on that valuation problem


HP is at it again. According to a story in Business Week - HP Shows Proclivity for High Premiums With ArcSight:

Hewlett-Packard Co. outbid at least two rivals to clinch its acquisition of ArcSight Inc., two people familiar with the $1.5 billion transaction said, underscoring HP's willingness to offer high prices for growth.

In my earlier posting, I raised the question of why HP would buy a company for 3.5x the pre-bidding war market value (and why Dell would have offered almost 2x pre-bidding market value to begin with). The answer, at least according to Sam Palmisano of IBM, is "they had too." Palmisano's view is that since HP has cut internal R&D, they have to buy innovation from outside.

That raises an interesting question. What are the benchmarks for valuation? Remember that there are three basic methods of valuation: actual cost, replacement value and market comparables. In this case, we generally look at market comparable. But HP's benchmarks for its acquisitions, if Palmisano is right, is replacement cost. What would it cost me in R&D to create what 3PAR and ArcSight already have. And, of course, since time to market is critical in these technology-intensive areas, how much would it cost to create this capability before my competitors do it.

Thus, this might be a perfect case of the value to the buyer being extraordinarily greater than the value on the general market. This information asymmetry is a standard problem in economies. So, how do we figure that into the calculations of intangible values?

Anti-trust and hiring employees

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Here is an issue that I'm not really sure how I feel about. According to a story in the Wall Street Journal - DOJ, Tech Firms Near Deal in Hiring Probe:

Several of the U.S.'s largest technology companies are in advanced talks with the Justice Department to avoid a court battle over whether they colluded to hold down wages by agreeing not to poach each other's employees.

The companies, which include Google Inc., Apple Inc., Intel Corp., Adobe Systems Inc., Intuit Inc. and Walt Disney Co. unit Pixar Animation, are in the final stages of negotiations with the government, according to people familiar with the matter.

As a side note, I note that this list does not include Oracle and HP -- reference their ongoing war over the hiring of Mark Hurd.

My ambivalence on this issue is whether such restrictions help or hinder innovation. The companies are arguing that such agreements are needed to reduce the risk of company collaboration -- i.e. that having employees from different companies working together increases the likelihood that one of those companies may identify one of those other employees as a target for recruitment. On the other hand, worker mobility has been an important part of the Silicon Valley success story. In fact, some have argued that the lack of non-compete agreements in California as been an important part of the employee mobility and the subsequent positive information flows. (See earlier postings about an Oracle/IBM fight on a top hire).

At least the action show that folks in at least one part of the government are taking seriously the idea that employees are a resource. As Mary Adams points out in her piece Are Workers a Cost or a Resource in Your Organization?, a lot of companies still don't get it. It would be interesting to see the DOJ economic analysis after it is all finished.

And the manufacturing transformation elsewhere

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Just a note to reinforce the importance of transforming manufacturing (see earlier posting), there is this story as well in the New York Times - China Shifts Away From Low-Cost Factories:

Companies here in China's industrial heartland are toiling to reinvent their businesses, fearing that the low-cost manufacturing that helped propel the nation's economic ascent is fast becoming obsolete.
These companies are moving into everything from manufacturing related services (e.g. inventory management) to higher-value added product development.

Bottom line: manufacturing is being transformed from low-cost mass production to a higher-valued process. America needs to keep up with that transformation. And we need government policies to help companies and workers make that transformation.

The coming manufacturing revolution

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I have long argued that manufacturing has become a knowledge intensive activity. Part of that transformation is a techniques of 3-D printing. Up until now, much of the technology was used for rapid-prototyping. A company could "print" a three dimensional version of a part or a product -- which would speed up the design and development process.

But now, the techniques has moved beyond use in the product development stage to actual production. According to a story in the New York Times, 3-D Printing Is Spurring a Manufacturing Revolution, some companies are using the technique to create finished products. These include exotic furniture, iPhone cases and prosthetic limbs.

As the story notes, however:

Moving the technology beyond manufacturing does pose challenges. Customized products, for example, may be more expensive than mass-produced ones, and take longer to make. And the concept may seem out of place in a world trained to appreciate the merits of mass consumption.
On the other hand, the story notes that "printed" prosthetic limbs can be made for about a tenth of the cost of a customized handmade version. As Scott Summit of Bespoke Innovations noted:
"We want the people to have input and pick out their options," he added. "It's about going from the Model T to something like a Mini that has 10 million permutations."
That is the future of the I-Cubed Economy.

Further update on 3PAR bidding war

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Over at M•CAM's blog Patently Obvious, they have done an analysis of the 3PAR deal from the point of view of the patents - and the finding is enlightening:

In the frenzy of attempting to place the winning bid, neither HP nor Dell fully considered the potential liabilities associated with owning 3PAR's intellectual property. For $2 billion, HP may have purchased the right to settle over $3 billion of new patent lawsuits.

As the full report goes on to state:

By bringing 3PAR's intellectual property into HP, the litigation risk to HP has gone through the roof - an observation that is not currently priced into the market.
Once again, it will be interesting to see how they handle the this in the financial statements. I've commented before on the question of how they will value the acquired intangible assets. Will they also discuss the litigation risks in the MD&A section?

That iTune business model

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Just a short follow up to my earlier posting on business models. I (and others) have often argued that one of the key success of the iPod was its business model -- in that it made it easy and legal to download music. Here is confirmation from Nick Bilton piece in New York Times A Technology World That Revolves Around Me:

While I was a student in college, my friends and I stole music all the time. Sure, you could buy some songs online, but the choices were extremely limited, and it's an understatement to say that the process of actually buying the music was painful. Getting it onto a digital device required a computer engineering degree and a lot of patience.

My music heist came to a screeching halt in 2003 when Apple opened the iTunes music store. With the single click of a button, I could download, transfer, and listen to an entire album or a single song. The entire transaction took seconds. And since the only way to do this with one click was to buy the music, I happily paid.

- - -

BTW - the point of the article:

When people want to know how the media business will deal with the Internet, the best way to begin to understand the sweeping changes is to recognize that the consumer of entertainment and information is now in the center. That center changes everything. It changes your concept of space, time and location. It changes your sense of community. It changes the way you view the information, news and data coming directly to you.

Now you are the starting point. Now the digital world follows you, not the other way around.

The piece is adapted from Bilton's (one of the NYTimes tech writers) new book: I Live in the Future & Here's How It Works. Not sure I completely buy this -- and not sure I haven't heard this line of "how everything has changed" before. But, still, interesting.

Importance of new business models

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The Economist's latest Technology Quarterly has it normal set of hot new techie ideas (literally since the lead story is on geothermal energy). It also has this interesting piece -- Energy in the developing world: Power to the people. The gist of the piece is that we already have the technology, we now need the innovation:

Providing energy in a bottom-up way instead has a lot to recommend it. There is no need to wait for politicians or utilities to act. The technology in question, from solar panels to low-energy light-emitting diodes (LEDs), is rapidly falling in price. Local, bottom-up systems may be more sustainable and produce fewer carbon emissions than centralised schemes. In the rich world, in fact, the trend is towards a more flexible system of distributed, sustainable power sources. The developing world has an opportunity to leapfrog the centralised model, just as it leapfrogged fixed-line telecoms and went straight to mobile phones.

But just as the spread of mobile phones was helped along by new business models, such as pre-paid airtime cards and village "telephone ladies", new approaches are now needed. "We need to reinvent how energy is delivered," says Simon Desjardins, who manages a programme at the Shell Foundation that invests in for-profit ways to deliver energy to the poor. "Companies need to come up with innovative business models and technology."

For those who don't remember, the village telephone ladies were women who formed companies or coops to buy a cell phone and then rent it out by the call to other villagers. It was (is) a critical step in the adoption of the technology - as the cost was generally out of reach of any one single villager. The telephone ladies is one of the shining examples of the success of micro-financing. Thus, there were two business model innovation powering the spread of mobile phones in these villages: the service delivery model and the financing model.

I whole heartedly agree with the Economist that new business models are a key to the energy issue. Later in the piece they provide a number of examples, such as these two:

One idea is to use locally available biomass as a feedstock to generate power for a village-level "micro-grid". Husk Power Systems, an Indian firm, uses second-world-war-era diesel generators fitted with biomass gasifiers that can use rice husks, which are otherwise left to rot, as a feedstock. Wires are strung on cheap, easy-to-repair bamboo poles to provide power to around 600 families for each generator. Co-founded three years ago by a local electrical engineer, Gyanesh Pandey, Husk has established five mini-grids in Bihar, India's poorest state, where rice is a staple crop. It hopes to extend its coverage to 50 mini-grids during 2010. Consumers pay door-to-door collectors upfront for power, and Husk collects a 30% government subsidy for construction costs. Its pilot plants were profitable within six months, so its model is sustainable. [emphasis added]

Emergence BioEnergy takes this approach a step farther. Its aim is to provide many entrepreneurial opportunities around energy production, says Iqbal Quadir, the firm's founder, who is also director of the Legatum Centre for Development & Entrepreneurship at the Massachusetts Institute of Technology (MIT). A cattle farmer in a small village in Bangladesh might, for example, operate a one-kilowatt generator in his hut, powered by methane from cow manure stored in his basement. He can then sell surplus electricity to his neighbours and use the waste heat from the generator to run a refrigerator to chill milk. This preserves milk that otherwise might be spoilt, offers new sources of income to the farmer (selling power and other services, such as charging mobile phones or running an internet kiosk) and provides power to others in his village.

But I would go even further. The issue is not simply one of new business models to spread adoption of existing technology. Nor is it just in developing nations. Changes in business models are needed in "developed" nations and go well beyond technology diffusion. Zipcar is still one of my favorite examples. Bikesharing is another.

So where are the policies to help foster and development new business models? One would be an expansion business incubator and start-up assistance services. The EDA reauthorization bill includes some of these programs (see earlier posting). We will see if Congress acts on this legislation -- and, more importantly, appropriates the money to actually fund the programs.

But incubators are just one example of the types of new policies we need. Putting together an innovation strategy that understands the role of organizational innovation and new business models would be the first step.

The long struggle to revive manufacturing

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Daniel Gros on reviving manufacturing in the US -- The Skills Deficit:

The key point is not that manufacturing jobs are somehow better, but rather that we must consider the asymmetry in the structural-adjustment process. It is relatively easy to manage a structural shift out of manufacturing during a real-estate boom, but it is much more difficult to re-establish a competitive manufacturing sector once it has been lost.

Post-bubble economies thus face a fundamental mismatch between the skills available in the existing work force and the requirements of a modern export-oriented manufacturing sector. Unfortunately, there is very little that economic policy can do to create a strong exporting sector in the short run, except alleviate the social pain. Labor-market flexibility is always touted as a panacea, but even the highest degree of it cannot transform unemployed realtors or construction workers into skilled manufacturing specialists. Experience has also shown that retraining programs have only limited success.

Ironically, Germany might provide the most useful template for the problems facing US policymakers. Germany experienced a consumption and construction boom after unification, with full employment and a current-account deficit. After the boom peaked in 1995, one million construction workers were laid off and could not find jobs elsewhere. The German economy faced a decade of high unemployment and slow growth.

Exports initially did not constitute a path to recovery because the deutsche mark was overvalued, and some manufacturing capacity had been lost during the unification boom. "International competitiveness" became the mantra of German economic policymaking. But it still took more than ten years for Germany to become the export powerhouse of today. [emphasis added]

And this is exactly why we need a new competitiveness strategy that embraces manufacturing as part of the intangible economy!

Here is Steven Pearlstein's take on the same topic:

At this point, there is only one clear path out of the unemployment box we have created for ourselves.

Right now, the United States is running a trade deficit that is likely to reach $450 billion this year. That's down considerably from the $750 billion at the height of the economic bubble, but still more than a wealthy advanced economy should have. Bringing it down - either by producing more of what we consume (fewer imports) or more of what other countries consume (more exports) - represents the path toward sustainable, long-term job creation.

The problem with that strategy is that for the past two decades we have allowed our industrial and technological base to deteriorate as talent and capital were grossly misallocated toward other sectors of the economy, even as other countries were able to attract the investment, the technology and the know-how to serve the U.S. and global markets.

For a time, none of this seemed to matter because we were consuming so much that we were able to support job creation at home as well as overseas. But now that the debt-fueled consumption binge is over, we find that we don't have the companies, the workers or the competitive products to replace the stuff we now import or expand our share of export markets. Even when we do, our companies are disadvantaged by an overvalued currency or unfair trading practices.

As Daniel Gros, director of the Centre for European Policy Studies, wrote this month for Project Syndicate, a wonderful new economics Web site: "It is relatively easy to manage a structural shift out of manufacturing during a real-estate boom, but it is much more difficult to re-establish a competitive manufacturing sector once it has been lost."

A structural shift toward exports and import substitution," Gros warns, "will be difficult and time consuming." He might have added that it will also be expensive, requiring sustained investment by government and industry, and internationally disruptive, requiring a much tougher line with trading partners that consistently tilt the playing field in their favor.

In this election season, the politicians who are really serious about creating jobs and bringing down unemployment won't be the ones screaming about tax cuts, or stimulus or some imagined government takeover of the economy. They'll be the ones talking about how to make the American economy competitive again.

I hope Pearlstein is right. But unfortunately, I don't hear a lot of voices talking about what it will really take to make the US economy competitive.

Other economic news

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Besides the trade data (see previous posting), there was other economic news coming out today.

This morning, the OECD released its latest economic assessment. They project 2.0% GDP growth in 3Q 2010 and then only 1.2% in 4Q. OECD Chief Economist Pier Carlo Padoan explains:

- - -

The Fed's beige book of economic conditions was released yesterday and painted a mixed picture:

Consumer spending appeared to increase on balance despite continued consumer caution that limited nonessential purchases, while activity in the travel and tourism sector picked up relative to seasonal norms. Activity was largely stable or up slightly for professional and other nonfinancial services. Reports on manufacturing activity pointed to further expansion, although the pace of growth eased according to several Districts. Agricultural producers and extractors of natural resources reported continued gains in demand and sales. Home sales slowed further following an initial drop after the expiration of the homebuyer tax credit at the end of June, prompting a slowdown in construction activity as well. Demand for commercial real estate remained quite weak but showed signs of stabilization in some areas. Reports from financial institutions pointed to generally stable or slightly lower loan demand and noted some modest improvements in credit quality.

As the Wall Street Journal notes:

The economic recovery is advancing unevenly across the U.S., as regions reliant on such industries as manufacturing and farming show progress while those more dependent on housing continue to struggle.
. . .
The decline in housing has pushed some states back into recession after a brief upturn, said Mark Zandi, chief economist for research and consulting firm Moody's Analytics, based on an index that takes into account income, employment, retail sales and industrial production.
. . .
Areas that rely more on manufacturing, meanwhile, have benefited from increasing demand, including a surge of export orders for farm and construction equipment churned out by Midwest factories. "We're having a little bounce from a deep bottom," said William Testa, an economist with the Chicago Fed, referring to the upturn in manufacturing in his district. "Longer term, it just depends on the strength of the U.S. and the world economies."

- - -

The long term strength of the US (and other) economy was the subject o another report out yesterday. The World Economic Forum new Global Competitiveness Report 2010-2011 (see also stories in the Washington Post and the Wall Street Journal). That report shows the US dropping from second to fourth place due to a number of factors:

In addition to the macroeconomic imbalances that have been building up over time, there has been a weakening of the United States' public and private institutions, as well as lingering concerns about the state of its financial markets.
It is interesting to note that these factors of institutions and the state of the financial markets are based on business leaders perceptions and opinions. The drop in the rating may reflect more the political climate in the US rather than the economic climate. Having said that, however, I would note that the inability of the governmental and political system to address economic issues is a major drag on a nation's competitiveness. If we end up in a situation of political stalemate, our competitiveness will be affected.

July trade in intangibles

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This morning's July trade data from BEA contain some welcome good news. The trade deficit shrank somewhat -- down to $42.8 billion from $49.8 billion in June, revised. Exports were up by $2.8 billion and imports were down by $4.2 billion. The improvement was in the goods category. As the chart below shows, our petroleum trade deficit was steady. The drop in the trade deficit was greater than expected. According to the Wall Street Journal, "Economists surveyed by Dow Jones Newswires had predicted a $47 billion trade gap."

While this is good news for the long run, the drop in imports may be due to lower consumer demand -- which is not good in the short term. The jump in exports is partly due to a surge in overseas sales of commercial aircraft -- which may not be sustainable. Exports of automotive vehicles and parts, food, feed, and beverages, and consumer goods declined.

Our intangibles trade surplus was essentially unchanged in July at $12.2 billion. The bad news is that exports of private services declined slightly and imports rose -- so the trade surplus in private services declined. These changes were offset by increased royalty payments coming in (exports) and smaller royalty payments going out (imports).

In keeping with the regular schedule of revisions, the intangibles trade data for the first half of 2010 was modified slightly to reflect better information. Data on royalty payments was revised very slightly. Private services data revisions show an increase in exports of on average $140 million per month and a decrease in imports of on average $185 million per month. As a result, the intangibles trade surplus was revised upwards for the first half of 2010 by on average $255 million per month.

Our deficit in Advanced Technology Products also improved in July as exports increased and imports slightly decreased. June's deficit of $8.4 billion was the worst monthly deficit since the government started publishing data specifically on Advanced Technology Products. The July deficit of $6.8 billion was smaller in comparison -- but still higher than May's deficit of $5.8 billion. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.

Intangibles trade-Jul10.gif

Intangibles and goods-Jul10.gif

Oil good intangibles-Jul10.gif

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.

How innovation works

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One of the more interesting aspects of looking at the innovation process is understanding where innovations come from. What drives the process? It is not just the standard popular image of some technological breakthrough (in the lab or in the garage or in the dorm room) that eventually becomes a product. Often times, innovation is driven by a specific customer need. That customer can be the end user -- or someone in the supply chain.

A story in today's New York Times on changes in product packaging illustrates the process. Two years ago Amazon launched a new initiative to reduce the packaging materials used in the products it sells. It especially wanted to simplify the packaging to reduce the frustration that comes with attempting to open many hermetically sealed packages. Anyone who ever felt like they needed a chainsaw to cut through the plastic packaging can immediately understand the issue.

The initiative is directly related to improving customer service. As the Times story notes, "Compared to the traditional versions of the products, frustration-free products have earned on average a 73 percent reduction in negative feedback on the Amazon site."

To carry out this initiative, Amazon is not engaged in packaging redesign itself. It is asking its supplier to ship in "frustration-free" packaging. In turn, those companies are looking to their suppliers for innovative solutions. Take the case of Phillips and its Essence electronic toothbrush. As the Times story says:

Philips asked the supplier AllpakTrojan if it could create a new package. Because manufacturers usually use one supplier for the plastic part of their packages and another for the cardboard, "even before you make anything you've lost a little efficiency in the design process," said Dave Hoover, sales manager for AllpakTrojan.

With this project, though, AllpakTrojan could use a single material, and it went through a machine just once instead of the two to three times required for the traditional package. "From design to finish, it's as efficient as it gets," he said.

Within three weeks, AllpakTrojan had designed the new container, tested it by dropping it from various heights and putting it on a vibration table and had it ready. The toothbrush's travel case protected the brush head, and cardboard compartments held the charger and toothbrush base. Without the fancy printing, shiny cardboard backing and plastic, "it's much less expensive," Mr. Hoover said. And the environmental benefit was significant: the square footage of material used was much smaller, and the cardboard was recycled and recyclable.

Philips said it was so happy with the change that it was looking to switch the packaging for other items.


This case tells a very different story from the "standard" linear model of innovation -- the one still embedded in our subconscious -- of research leading to technology development to product development to demonstration to commercialization. And I doubt that AllpakTrojan shows up in the statistics as being an R&D intensive company. Yet, its innovation may have a large impact on costs, the environment and customer satisfaction.

So, where is the public policy that supports and fosters this type of real-world innovation?

Investment tax breaks and intangibles

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According to press reports, tomorrow President Obama will propose a package of investment tax credits that will allow companies to completely expense any investment in new plant and equipment through 2011. Accelerated write off of such tangible investments is a traditional means of boosting spending. Companies love to be able to write off equipment quickly as it lowers their tax bill by allowing them to count those expenditures as costs (which reduces taxable profits) immediately -- rather than over a longer period of time. [On the other hand, for financial reporting purposes, companies like to depreciate those expenses over a longer period of time -- because that raises reported profits. This is one of the major areas where a company's tax accounts and financial accounts diverge.]

However, immediate expensing of does nothing to help boost investments in intangible assets -- as intangibles are generally immediately expensed already. The way to deal with that problem is in the second part of the proposed Obama tax package -- the R&D tax credit. The President also proposed to expand and make permanent the research and experimentation tax credit. According to press reports, the credit would be simplified and increased from 14% to 17%.

That is fine for the R&D part of intangible investments. But intangibles cover much much more than R&D. As I have long advocated, the R&D tax credit needs to be turned into a broader knowledge tax credit. A knowledge tax credit would apply to company expenditures on worker training and education -- just like the R&D tax credit applies to expenditures on research activities. In only make sense that boosting worker skill levels is a necessary compliment to any activities to raise innovation and productivity. After all, innovation doesn't come solely from the lab any more.

It also makes sense to pair the knowledge tax credit with any efforts to incentivize increased investment in plant and equipment. If we give companies incentives to conduct research or invest in new equipment we should also give companies incentives to invest in their most valuable asset: their workers.

3PAR update - 2

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The Wall Street Journal has a nice analysis of the bidding war -- including this graph of the valuation.

3PAR.gifAnd as I've noted before, it will be interesting to see how much of that balloon is made up of real intangible assets and how much is froth (aka "goodwill").

August employment

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While not as bad as economist had expected (see WSJ and NYT estimates), the BLS data on employment released this morning shows a stagnate labor market:

The number of unemployed persons (14.9 million) and the unemployment rate (9.6 percent) were little changed in August. From May through August, the jobless rate remained in the range of 9.5 to 9.7 percent.

In part, this may be function of more people looking for a job, as the labor force increased. The number of voluntary part time workers (see chart below).

However, as the chart below shows, both the number of involuntary underemployed (part-time for economic reasons) and the number of workers involuntarily underemployed because of slack work increased in July. The increase in slack work is especially of concern as it indicates a slight slowdown in production.



Update on 3Par Bidding War

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In my earlier posting on the HP - Dell bidding war for 3Par, I wondered how much of the valuation was due to a better understanding by the bidders of the target's intangible assets. Was there some hidden value that the market didn't see in the company -- especially for the acquiring company? It could well be, given that investors may value intangibles differently than an operating company.

Now comes word that the war is over and HP has won. Dell dropped out when HP raised its price to $33 a share. This is for a company that was trading at Dell was originally willing to pay $18 a share for and was trading at $9.65 before the bid was made.

Does anyone really believe that value of 3Par's intangible assets are almost 3.5X greater that what the market estimated? Maybe the $18 bid make sense, but I can't help thinking that the last price is nothing but froth.

It will be very interesting to see how HP books the value of those intangibles once the acquisition is finalized.

Better consumers, more innovation

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It has long been a truism in innovation studies that demanding customer are an important source of innovation. But how does public policy affect the creation of demanding customers? There are two possible lines of thought on this -- neither being mutually exclusive. The first is that of competition (anti-trust) policy. If consumers are given a choice, they will spur innovation. The second is that of government procurement. The government itself can act as a demanding customer to spur innovation. The standard case is that of military and space technologies.

But an interesting approach alternative approach might emerge from looking at OECD's new Consumer Policy Toolkit:

The OECD publication "Consumer Policy Toolkit" examines how markets have evolved and provides insights for improved consumer policy making. It explores, for the first time, how what we have learned through the study of behavioural economics is changing the way policy makers are addressing problems.
The Toolkit is process oriented. It does not make specific policy recommendations although it describes the array of policy options ranging from consumer awareness and education to prohibitions on certain activities.

Nor is specifically being touted as an innovation policy. Its goal is to help consumer protection policy makers "quickly respond to a rapidly changing and highly sophisticated marketplace."

But its implications for innovation policy is obvious. If consumers are better prepared to cope with the more sophisticated marketplace, they will be better customers. And better customers are more likely to be more aware of their needs -- and demand more from the goods and services being offered. That demand will spur innovation.

A new IP development fund

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In a couple of earlier postings, I discussed how the German company managing the patent portfolio of the Deutsche Bank IP funds has gone bankrupt. While the funds are still operating, this raise the question as to whether this model of acquiring patents for further development is viable. The idea is to take technologies that are not yet ready for commercialization and finish the job. This is in contrast to the model of acquiring patents to already developed and being utilized technologies -- to gain the licensing revenues and legal assertion awards.

Now, according to the blog IP Finance, the Japanese are going to try a similar fund in life sciences. We will have to wait and see if they are any more successful.

    Note: the views expressed here are solely those of the author and do not necessarily represent those of Athena Alliance.

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