October 2010 Archives

GDP for 3Q 2010

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The GDP number out today of a 2% growth shows an economy growing at a slightly greater than last quarter's 1.7%. But this is still weak relatively weak growth (see stories in the New York Times, Wall Street Journal and Washington Post.

And the numbers are subject to revision as the trade data is a month behind. The advanced estimate assumes a worst trade picture this quarter compared to last quarter. Given the last two months data (see previous postings), that is a safe assumption.

Still, as I've state before, we still have a lot of work to do to improve the numbers (see earlier posting). In the meantime, we should remember that the data always contains an element of uncertain and should be treated accordingly.

Offshoring and manufacturing

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Here is a new paper from the W.E. Upjohn Institute for Employment Research -- Off shoring and the State of American Manufacturing. Written by Susan Houseman of the Upjohn Institute and Christopher Kurz, Paul A. Lengermann and Benjamin Mandel of the staff of the Federal Reserve Board, the paper take a new look at the productivity and output numbers and finds them lacking:

First, the robust output and productivity growth in manufacturing is largely attributable to one industry: computer and electronic products manufacturing. The average annual growth rate of value added in manufacturing excluding computers--which accounted for about 90 percent of manufacturing value added throughout the period--was less than a third of the published growth rate for all manufacturing. As a result, the aggregate numbers do not accurately characterize trends in most of manufacturing.

Second, the price declines associated with the shift to low-cost foreign suppliers generally are not captured in price indexes. The problem is analogous to the widely discussed problem of outlet substitution bias in the literature on the Consumer Price Index (CPI). Just as the CPI fails to capture lower prices for consumers due to the entry and expansion of big-box retailers like Wal-Mart, import price indexes and the intermediate input price indexes based on them do not capture the price drops associated with a shift to new low-cost suppliers in China and other developing countries. A bias to the input price index from offshoring implies that the real growth of imported inputs has been understated. And if input growth is understated, it follows that the growth in MFP and real value added have been overstated.

Bottom line:

These biases have implications not only for the industry statistics, but also for the analyses based on them. Because the growth of these imports will be understated in real terms, offshoring will, at least to some degree, manifest itself as mismeasured productivity gains. As a result, studies that endeavor to assess the impact of low-cost imports on the American economy and its workers may well understate the true effects.

As with our efforts to keep up with measurement of the shift to an intangible economy, so too must we continue to improve our economic statistics on the affects of globalization. Otherwise we will make bad policy decisions.

Describing the transformation

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Tom Friedman's column on Sunday was about the election and economy. But it contains a great description of the transformation. He conceds the point that areas are doing well, such as new technologies.

But not everyone can write iPhone apps. What about your nurse, barber or waiter? Here I think Lawrence Katz, the Harvard University labor economist, has it right. Everyone today, he says, needs to think of himself as an "artisan" -- the term used before mass manufacturing to apply to people who made things or provided services with a distinctive touch in which they took personal pride. Everyone today has to be an artisan and bring something extra to their jobs.

For instance, says Katz, the baby boomers are aging, which will spawn many health care jobs. Those jobs can be done in a low-skilled way by cheap foreign workers and less-educated Americans or they can be done by skilled labor that is trained to give the elderly a better physical and psychological quality of life. The first will earn McWages. The second will be in high demand. The same is true for the salesperson who combines passion with a deep knowledge of fashion trends, the photo-store clerk who can teach you new tricks with your digital camera while the machine prints your film, and the pharmacist who doesn't just sell pills but learns to relate to customer health needs in more compassionate and informative ways. They will all do fine.

But just doing your job in an average way -- in this integrated and automated global economy -- will lead to below-average wages. Sadly, average is over. We're in the age of "extra," and everyone has to figure out what extra they can add to their work to justify being paid more than a computer, a Chinese worker or a day laborer. "People will always need haircuts and health care," says Katz, "and you can do that with low-wage labor or with people who acquire a lot of skills and pride and bring their imagination to do creative and customized things." Their work will be more meaningful and their customers more satisfied.

And so where are the government policies to help bring about this transformation?

Baldrige Performance Excellence Award

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One of the recommendations I have been making for some time is the re-orientation of the Baldrige Quality award into something broader. (See our 2008 report Crafting an Obama Innovation Policy). Over the years, the criteria for the Baldrige Award have changed with the times. As these criteria have shifted and broadened, the award has become much more productivity and innovation focused. Much of this shift, however, has not been recognized. The change in the name would both better advertise the broader nature of the award and provide an opportunity to review and modify the criteria to reflect this broader view. In addition to changing the name, the award should be given greater visibility by the President. By presenting the awards personally, the President could use it as an opportunity to showcase innovative American companies and collaborations.

This would obviously be more of a symbolic act. But it could be used to highlight the issue. And the reorientation of the criteria would help promote organizational performance.

Earlier this month, the Commerce Department announced that it was changing the name of the program to the Baldrige Performance Excellence Program. The Dr. Harry Hertz, the program director, put it this way:

Today, the Baldrige Criteria focus on the way a successful organization can effectively plan and mange its operations for current success and long-term sustainability. The Criteria form a management framework covering everything from leadership, strategic planning, and knowledge management to a focus on the workforce, customers, and all performance results. To reflect the 23 years of changes since our program was created, as of October 2010, our name is changing from the Baldrige National Quality Program to the Baldrige Performance Excellence Program.

I think this is a step in the right direction. But I was disappointed to see how quietly this was rolled out. I hope with the new name there will also be a reinvigorated effort to publicize the program. The program was successful in meeting the quality challenges of the 1980s and 1990s. A reoriented and reinvigorated program can help address the transformation and innovation challenges facing us today.

I have long argued that government procurement is an important tool in spurring innovation. Here is a piece from Steven Hayward of the American Enterprise Institute on energy policy. The article (originally published in the conservative Weekly Standard - which makes it even more interesting) outline a cross-ideology proposal for increasing innovation in the energy sector as a means of attacking our energy problem.

The first two recommendations are straight forward: increase spending on research in the basic sciences related to the energy sector and improve mechanisms for development and diffusion of new technologies in conjunction with the private sector. The third is more intriguing:

Third, driving innovation and price declines requires that the government act directly as a demanding customer to spur the early commercialization and large-scale deployment of cutting edge technologies. Today, firms get subsidies that reward production of more of the same product, instead of innovation that results in lower prices. This framework should be turned on its head. Energy technologies should receive federal deployment funding only to the extent they are becoming cheaper in unsubsidized terms. Either technologies continue to come down in price or they are cut off from future public investment.

The Department of Defense has a long track record of using the power of procurement successfully to drive the commercialization and improvement of everything from radios and microchips to camera lenses and lasers. In contrast, the Department of Energy has never really played this role. Energy Secretary Steven Chu deserves applause for his efforts to make his department a more effective funder of breakthrough research, but the agency has no way to either procure or use energy technologies at commercial scale. The Department of Defense should help fill this void, once again using procurement to advance a range of potential dual-use energy innovations.

I would note that the government can also serve as the "thin opening wedge" for technology development. In many cases, a new technology is not necessarily much better than the technology it replaces. Yet it is better on a few specifics -- which may be of specific importance to a governmental activity. Case in point is semiconductors and the space program -- where size and power requirements outweighed the costs. Having the government as a early adopter of a new technology provides that first real world utilization test so critical for the refinement and further development of a technology.

Interestingly the piece also contains a defense of greater government involvement in R&D:

No doubt critics will say this level of state involvement in promoting technological innovation doesn't sound very Reaganite, but they are wrong. Just as Reagan's Strategic Defense Initiative was intended to be a long-range game changer rather than just another weapons system, this energy strategy is intended to reestablish the United States as the global leader in energy innovation and potentially upend the geopolitics of energy. I share all of the general reservations and skepticism about government-sponsored research and development. Yet for all of the boondoggles one can rightly point to, such as Jimmy Carter's hapless Synfuels Corporation, there is also a record of government-sponsored technology achievement that it would be churlish to overlook. The lesson is that government investments succeed not when they are blanket subsidies but when they are targeted to specific outcomes, such as developing computers to enable rocket systems, building a communications network to survive a nuclear attack, or creating increasingly efficient and powerful jet engines. These public investments and supporting regulatory changes paid off handsomely in personal computers, the Internet, and both commercial air travel and the gas turbines used in modern natural gas power plants. Government-sponsored research in biochemistry has played a substantial role in the development of new pharmaceuticals.

These are great suggestions -- and proof that we can bridge the ideological (and partisan) divides. I hope the policymakers and politicians will take these recommendations to heart.

Management as an intangible

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Good management is one of those intangible assets that is often taken for granted. But it shouldn't be -- since good management makes a big difference in the performance of an organization (and conversely bad management hurt performance). But how to prove that? The general answer is that well managed companies thrive and poorly managed companies fail.

Unfortunately, that is no answer at all. Many other circumstances may account for the overall company performance. Badly managed companies in a favorable situation can limp along -- succeeding but not living up to their potential. So how can we ascertain the importance of good management?

Here is a new study from Stanford University and the World Bank -- Does Management Matter?: Evidence from India -- see also the short description on the World Bank's "All about Finance" blog and a video. The study is really a report of an experiment. The World Bank teamed up with the management consulting firm Accenture to provide 5 months of management training to a group of Indian textile factories. A similar group that was not given the training was identified as a control group. The result was that for the group receiving the training, the product defect rate declined, inventory levels fell, output improved, and productivity increased.

Now, the training was pretty basic stuff. As Ray Fisman notes in his article in Slate on the project:

The study's authors enumerate 38 practices that define good management. These include routines to record and analyze quality defects, production and inventory tracking systems, and clear assignment of job roles and responsibilities.

One could argue, therefore, that these companies lacked the basic tools of modern management. They were essentially still family owned, owner run companies -- straight out of Alfred Chandler's description of "family capitalism." In fact, one of the outcomes of the training was that the companies moved away from direct family control to greater involvement by middle management.


Thus, the report is evidence that "management" writ large helps. The shift from family capitalism to managerial capitalism increases performance. What it does not address is the question of incremental improvement -- that "better" management increases performance.

So "management" is an important intangible asset. What we need to focus on two fold:
1) how to create that asset in the hundreds of small businesses in the US
2) how to improve that asset once it has been created.

The study is useful on the first point. We need more work on the second.

The Economist recently published a special report on the world economy -- specifically a look at how to restart economic growth. In the concluding piece in the report, they lay out the bottom line:

If the rich world really wants to go for growth, it must get away from its narrow focus on public debt and embark on a broader economic overhaul.
The nature of that economic overhaul is discussed in greater detail in an earlier piece in the report on productivity entitled "Smart work". In that piece they make an important point:
More important, the politicians' current focus on fostering productivity growth via exciting high-tech breakthroughs misses a big part of what really drives innovation: the diffusion of better business processes and management methods.

Right on!

Unfortunately, their policy solution to make this come about is simply laissez-faire deregulation of the service sector:

The best thing that governments can do to foster new ideas is to get out of the way.
. . .
All this suggests that for many rich countries the quickest route to faster productivity growth will be to use the crisis to deregulate the service sector.

I won't argue that part of the service sector in some countries need reforming. But it is absurd to argue that in light of the recent crisis of a key service sector -- the financial sector -- the best thing to do is "get out of the way."

In fact, "getting out of the way" will not transform the service sector. Much of actions that the Economist would tout as the benefits of reform are in fact left over from the industrial age. When they talk about the need to open up European economic boundaries to greater cross-national competition, they are talking about the industrial age idea of consolidation and economies of scale. Take for example their praise for Sweden's retail sector: "Large stores and vertically integrated chains rapidly gained market share." That is straight out of Commodore Vanderbilt's playbook on the railroads in the 1870's.

There is so much more to the transformation that extending economies of scale and scope to certain service sectors. Rather than get out of the way, the government needs to actively promote the transformation. It mean changing the regulations to foster innovation -- not eliminating them. As I've noted before, regulations can spur innovation as well as retard them.

Governments can also increase support for broad knowledge creation (what we often call in a limited way "R&D") and mechanism to diffuse that knowledge. The UK's NESTA has done path breaking work on "hidden innovation." Where are the tax and investment policies to support business invests in that type of innovation?

I have long promoted the idea of a knowledge tax credit. We have long understood that increased private investment in plant and equipment is necessary for continued economic growth. As a result, there are various tax incentives for investment in equipment. So why would we treat our people -- which everyone says are companies' most important asset -- worse than equipment? If a tax incentive for investment in machinery is appropriate, so is a tax incentive for investment in workers. It is as simple as that.

We need to do more to understand the transformation and the development of high performance work organizations. This means a greater understanding of how to create a high road strategy -- includes helping companies better manage and utilize their intangible assets. It also means developing a better understanding of the service-manufacturing linkage.

We need to find creative ways to help companies utilize that understanding. We especially need to help the smaller supplier move up the value-chain to take advantage of this shift. Here we have a valuable tool in the Manufacturing Extension Partnerships. The MEPs were on the front lines helping small and medium size companies during the quality revolution. They need to be on the front lines of the intangible asset, innovation and "customer solution" revolution.

We should expand the National Science Foundation's (NSF) Engineering Research Centers program to support the creation of Design Research Centers as well as promote research and teaching of integrated design thinking. Innovation success is heavily reliant on design as a key component but not simply involving the physical appearance of products. A new approach to applied problem solving and innovation is emerging under the rubric of design thinking. Successful models include the Stanford Design School and the Institute of Design at the Illinois Institute of Technology (IIT), among others.

These are a few of the positive actions government could take. I'm sure there are thousands of others we could think of if we all tried.

Increasing funds for green manufacturing

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In the earlier posting on energy technologies, I commented that we need to do more than research to make sure that new energy technologies are manufactured and deployed in the US. One of my favorite successful piece of the stimulus package is a programs to address this very problem -- Section 48C Advanced Energy Manufacturing Tax Credit program (see previous postings). This program gives tax credits to companies that manufacture green technologies in the US. The program was originally funded at $2.3 billion -- and was oversubscribed. Much has been said about increasing the funding. But to date nothing has happened. Right before the Senate when out for the electioneering break, my old boss, Senator Jeff Bingaman introduced a bill containing a provision to over double the funding to $4.8 billion. Bingaman is Chairman of the Senate Energy Committee and the bill was cosponsored by the Small Business & Entrepreneurship Committee Ranking Member Senator Olympia J. Snowe (R-ME). Both Bingaman and Snowe also sit on the Finance Committee, where the bill was referred to.

Nothing will happen to this bill until Congress returns for a lame-duck session. But I hope the lame-duck will take up and pass this measure. As I said, it is only of the more successful programs -- both in stimulating the economy in the short run and helping create a long-run competitive green manufacturing industry in America.

August trade in intangibles

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The August trade data from BEA showed our trade deficit worsening. The deficit rose from $42.6 billion in July to $46.3 billion in August. The jump was both dramatic and unexpected. According to the Wall Street Journal, economists predicted a a deficit of $43.4. Exports were basically flat (increasing a slight $0.3 billion) while imports grew by $4.1 billion. Imports increased in all major categories: industrial supplies and materials ($12.0 billion); capital goods ($8.3 billion); consumer goods ($7.4 billion); automotive vehicles, parts, and engines ($6.1 billion); foods, feeds, and beverages ($1.1 billion); and other goods ($0.5 billion). As the chart below shows, the deficit in both petroleum and non-petroleum goods increased.

Our intangibles trade surplus grew slightly by $191 million to $12.5 billion. Exports and imports of private services both increased -- with exports rising faster than imports. Royalty payments coming in (exports) increased while royalty payments going out (imports) declined slightly.

Our deficit in Advanced Technology Products dramatically worsened August as exports dropped by over $2 billion. August's deficit of $8.76 billion was the worst monthly deficit since the government started publishing data specifically on Advanced Technology Products --even worse than the then-record setting June deficit of $8.4 billion. Much of the deficit was due to a $1.7 billion drop in aerospace exports. 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-Aug10.gif

Intangibles and goods-Aug10.gif

Oil good intangibles-Aug10.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.

Friedman on a new energy program

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Tom Friedman on the Department of Energy's proposal to create eight Energy Innovation Hubs for research in advanced technologies -- and the question of whether Congress will allocated the requested $25 million to fund these centers:

In my view, Congress should be funding all eight right now for five years -- $1 billion -- so that we not only get graduate students, knowing the research money is there, flocking to these new energy fields but we get the benefit of all these scientists collaborating and cross-fertilizing.

Friedman can't believe that we are not moving ahead with such a program. He uses his conversation with Kishore Mahbubani, the dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore as the foil:

The Singaporean is aghast. He simply can't believe that at a time when his little city-state has invested more than a billion dollars to make Singapore a biomedical science hub and attract the world's best talent, America is debating about spending mere millions on game-changing energy research.

I agree -- we should all be aghast. But we need to do much more in order to assure that these technologies are not only developed but manufactured and deployed in the US (more on this later).

Friedman is using this one program to make a larger point:

This may seem like a little issue, but it is not. Nations thrive or languish usually not because of one big bad decision, but because of thousands of small bad ones -- decisions where priorities get lost and resources misallocated so that the nation's full potential can't be nurtured and it ends up being less than the sum of its parts. That is my worry for America.

I too fear the thousands of small bad decisions. I know it is a cliche, but death by a thousand cuts is still death. And the cuts are adding up.

ISO and brand valuation

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Joff Wild over at IAM magazine has the latest on the new ISO standard for brand valuation. The short take is that this appears to be a process standard. As the ISO website on the standard notes:

ISO 10668:2010 specifies a framework for brand valuation, including objectives, bases of valuation, approaches to valuation, methods of valuation and sourcing of quality data and assumptions. It also specifies methods for reporting the results of such valuation.
Interesting -- but let's see if the accountants buy in.

Economics -- the lag between theory and application

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By now everyone has heard that the 2010 Noble Memorial Prize in Economic Science went to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides for their work on "markets with search friction." In layman's terms, that means markets where buyers and sellers have to search for each other. This work is an extension of theories of previous Noble laureates on imperfect information in markets, such as George Stigler.

One of the best applications of the theory by the newly announced laureates has been to the labor market. It explains how it is possible to have high unemployment even when jobs are available. As the New York Times noted:

These researchers' explanation addresses the complications that come from searching for jobs and job candidates: it takes time for unemployed workers to be matched with the proper opening, since people are not identical, cookie-cutter units, and neither are jobs.
The policy implication (according to Ed Glaeser) is that, "this insight led to Professor Diamond's conclusion that higher levels of unemployment insurance could improve the workings of the labor market by making some workers pass up marginal jobs."


In his excellent column explaining the research (The Work Behind the Nobel Prize), Ed Glaeser ends with this comment:

The work of these economists does not tell us how to fix our current high unemployment levels, but it does help us to make some sense of our current distress. Their models tell us that common wisdom -- like the belief that higher unemployment benefits always increase unemployment -- may be wrong and that policies that improve matching may have great value. Rarely has the prize committee been better able to match the honored work with the moment.
However, Glaeser also noted that most of the work was done in the 1970's and 80's with the final "masterpiece" published in 1994.


So, for the past 15 years, the "common wisdom" (as Glaeser refers to it) has been that unemployment benefits increase unemployment even though economic research had shown that might be wrong. Rather than glory in the timeliness of the announcement, I have to ask the question, why did this research take so long to filter into the policy debate?

Patent measures are not the same as innovation measures

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Over at the blog IP Finance, Neil Wilkof has a great posting on a recent Economist story on innovation aka patents -- Patent Data and Innovation: Once Again, So Much and Yet So Little. I won't repeat his entire analysis -- you can read it for yourself. However I will stress one point he makes:

First, the article does not really address the connection between patents and innovation. Is it really the case that increased patent filings in China and by Chinese points to increased innovation? Maybe yes, maybe no--the article does not really explain.

My guess is that the article didn't explain because there is little too explain. Yes, patent data is interesting. But it doesn't begin to tell the innovation stroy. For example, patent data doesn't even begin to look at what is being called "hidden innovation." (For more on hidden innovations, see the UK's NESTA report on innovation in industries where levels of traditional R&D investment are low. These include: architectural services: accounting; business and management consultants; legal services; software and IT services; automotive industry; construction; energy; and design services.)

Patent data suffers from the "drunk-under-the-lamppost" problem -- [Late at night a drunk is searching for his lost car keys under a lamppost. Cops comes up and asks him what he is doing? Drunk answers, "looking for my car keys." Cop asks where he last saw his keys (of course the cop has no intention of letting him into the car). Drunk points over to his car. Cop asks, "so why are you looking over here?" Drunk answers, "because this is where the light is."]

Bottom line: patent data tells you a lot about patents. It doesn't necessarily tell you about innovation.

Understanding innovation as a learning process

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In Sunday's Washington Post, Ezra Klein uses his critiques of the new movie "The Social Network" to talk about innovation. As he notes about the movie:

it misses the richer drama behind transformative innovations like Facebook, and it's part and parcel of the way we misunderstand, and thus impede, innovation.
"The idea of the lone genius who has the eureka moment where they suddenly get a great idea that changes the world is not just the exception," says Steven Johnson, author of " Where Good Ideas Come From: The Natural History of Innovation ," "but almost nonexistent."
And that's because innovation isn't really about individuals.

That is exactly right! But innovation isn't just about technology either. Unfortunately, when it come to policy recommendations, Klein falls back on the general hand-waving solutions:

You need a good education system. You need intellectual-property rules that ensure space for new ideas and uses. You need a tax code that encourages research and development spending. You need, in other words, to furnish people with an environment in which innovation can take place.

Doing that last part -- creating the environment -- goes well beyond education, IP law and tax incentives for R&D. In Steven Johnson's TED2010 talk, he describes the importance of the innovative "space" and how ideas evolve through networks. He argues that innovation is a learning process.

So the policy question is how to build these spaces for the learning process. Note that I say "learning", not "education" -- two very different processes. We need more attention to knowledge flows and knowledge networks. And we need to think of these knowledge flows for ideas that go beyond new technologies.

This is new territory for policy -- one that we need to explore quickly.

(By the way, Johnson tells the story of how GPS came about -- including the policy decision to open up the Cold War system to commercial use. How do we create a policy framework that captures that trajectory?)

September employment data

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Once again, the BLS data on employment released this morning shows a stagnate labor market. The unemployment rate remained unchanged while total employment dropped by 95,000. The report contains some good news (private sector employment) and some bad news (government employment):

Government employment declined (-159,000), reflecting both a drop in the number of temporary jobs for Census 2010 and job losses in local government. Private-sector payroll employment continued to trend up modestly (+64,000).

Once again, 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 September. The increase in slack work is especially of concern as it indicates a slight slowdown in production.

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First mover advantage?

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First mover advantage is part of the standard lore of the I-Cubed Economy. It means that the first company into a market generally wins. The idea is that the first mover benefits from technological lock-in. But that only works if the first mover sets the product standards and there is high cost to the consumer of switching to a different competitor.

What is the alternative? Many have argued that beginning a "fast follower" is a better strategy. Steve Blank outlines this strategy in a recent article -- You're Better Off Being A Fast Follower Than An Originator. According to Blank, first movers (those who are first to sell a product) have a 47% failure rate. Fast followers (those who enter early but not first) have an 8% failure rate.

In part, this should not be surprising. Not every product is a success. In fact, most of them fail. So the first movers are those that clear out the duds. Fast followers have an easier strategic choice since they are coming into a proven but nascent market.

This does not mean, however, the there is no first mover advantage. A first mover who throws a lot of products at the market is bound to have success -- even if their batting average is low on anyone product. And a first mover who does succeed in establishing lock-in with high switching costs will likely succeed (for example in the pharmaceutical industry).

For me, the bottom line is not first mover versus fast follower. The real question is finding the strategy that is right for the product and right for the market.

Universities and Intellectual Property

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The National Research Council (the research arm of the National Academies) has just released its new report on Managing University Intellectual Property in the Public Interest. The product of two groups -- the Board on Science, Technology, and Economic Policy (STEP) and the Committee on Science, Technology, and Law (CSTL) -- this report looks specifically at the university technology transfer system put in place as a result of the Bayh-Dole Act of 1980.








The university tech transfer system has been under criticism from two fronts. One side believes the system of centralized university tech-transfer offices puts a barrier between inventors and the market. They would like to see university faculty have the freedom to pick their own path rather than use the universities' tech transfer system. The other side see a misguided the focus by the tech transfer system on maximizing licensing revenues - to the determent of other knowledge creation activities.

The report finds the basic system has been effective, but in need of improvements. Among those improvements should be a clearly articulate set of goals by the university as to the role of tech-transfer as part of the core educational and knowledge creation purpose of universities. As the report states, "Patenting and licensing practices should not be predicated on the goal of raising significant revenue for the institution."

With respect to the other critique, the report states: "A persuasive case has not been made for converting to an inventor ownership or 'free agency' system in which inventors are able to dispose their inventions without university administration approval."

The report contains a number of specific recommendations to improve the existing system. This includes better oversight by the federal government of its own technology transfer system and how that interacts with university-based research.

I doubt that the report will end all the debate on university tech-transfer. At least it will give the debate a better framework. The transfer and flow of knowledge is a key element of the I-Cubed Economy. Universities play an important role in that flow. So getting the university "knowledge-transfer" system right is important. The "tech-transfer" system need to be seen in that larger context. Patents and licenses, as the report notes, is just one part of overall university activities:

The transition of knowledge into practice takes place through a variety of mechanisms, including but not limited to:
1. movement of highly skilled students (with technical and business skills) from training to private and public employment;
2. publication of research results in the open academic literature that is read by scientists, engineers, and researchers in all sectors;
3. personal interaction between creators and users of new knowledge (e.g., through professional meetings, conferences, seminars, industrial liaison programs, and other venues);
4. firm-sponsored (contract) research projects involving firm-institution agreements;
5. multi-firm arrangements such as university-industry cooperative research centers;
6. personal individual faculty and student consulting arrangements with individual private firms;
7. entrepreneurial activity of faculty and students occurring outside of the university without involving university-owned IP; and
8. licensing of IP to established firms or to new start-up companies.

Pursuing all of these mechanism is important. Universities need to create an environment to allow that. Sometimes that balancing can be difficult. But nothing the universities do should inhibit that primary role of knowledge creation and dissemination. That is their most important function in the I-Cubed Economy.

Retailers localize

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One of the hallmarks of the industrial age was standardization of mass production/mass consumption. In the retail sector, this meant consolidation of stores into giant chains. Starting with the Sears stores and catalogs, shoppers anywhere in the nation had access to the same goods. Buying was centralized with the same fashions showing up in Boise as in Baltimore. With better inventory control systems, some variation was allowed -- such as stocking more snow shovels in Buffalo and more sunscreen in Phoenix.

But the hallmark of the I-Cubed Economy is more customization. Some big retailers are attempting to move in that direction. As a story in Sunday's New York Times relates -- Macy's Goes Local in Matching Goods to Customers

After decades of acquiring, consolidating and centralizing, the department store chain is rediscovering -- and financially exploiting -- its multiple local roots, advancing a trend that is quickly being adopted by other retailers like Saks Fifth Avenue and Best Buy.
. . .
Macy's tested its new local approach in a handful of stores in 2008, introducing it in all 810 stores last year. In essence, Macy's requires sales clerks and store managers to examine the local population almost like anthropologists -- studying, for example, what churchgoing black women here in Atlanta shop for compared with the shopping habits of Microsoft wives, as employees call one segment of shoppers in the store in Bellevue, Wash.


At the same time, the retailer doubled its staff overseeing store assortments and decreased the stores that staff members dealt with. It required the people responsible for merchandise assortment to visit stores daily, added log books at each register where sales clerks entered suggestions from shoppers, and introduced a review process so the staff visiting stores could make recommendations to buyers.

There are items that would fit in an olden-days department store. The old Marshall Field's store in Chicago sells Frango chocolates, boxed as they were in the past. In the Northwest, at Bon Marché, Frangos come wrapped in cellophane and are packaged in an octagonal box, the traditional presentation in Seattle. In Minnesota this year, stores began carrying krumkake irons, a Scandinavian baking tool.


An interesting trend -- but not a return to the pre-mass consumption days. Don't expect the Wal-Mart to turn back into the mom-and-pop . Do expect to see retailers cater more to their local demographic -- as "just-for-me" meets "just-in-time" retailing.

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


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