Tag Archives: innovation

To infinity, and beyond

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Brad Stone’s [amazon_link id=”059307047X” target=”_blank” ]The everything store: Jeff Bezos and the age of Amazon[/amazon_link] is a rattling good read, and it should be on everybody’s reading list. The raw material is a gift to a storyteller of course. Jeff Bezos is clearly an extraordinary character, Amazon an extraordinary company, and the period since the dawn of the internet an extraordinary era. Stone has covered the company for many years and the account here is authoritative.

[amazon_image id=”059307047X” link=”true” target=”_blank” size=”medium” ]The Everything Store: Jeff Bezos and the Age of Amazon[/amazon_image]

The book is particularly good on the distinctive dynamics of online businesses, and the consequences for the various strategic calls Amazon has had to make. For example, when a solitary analyst at Lehmans, Ravi Suria, started to write negative reports in 2000 about Amazon’s then-low or negative margins, it risked becoming a self-fulfilling prophecy because financial viability depended on suppliers not demanding faster payment, and on customers having the confidence to continue flocking to the website. I hadn’t really appreciated before Amazon’s negative working capital requirement as customers pay for goods faster than suppliers need to be paid for them.

There are descriptions of moves straight out of the playbook of [amazon_link id=”087584863X” target=”_blank” ]Information Rules[/amazon_link] by Carl Shapiro and Hal Varian (although this book, one of my all-time favourites, isn’t referenced), such as super saver delivery – free for people who don’t mind waiting longer – and also Clay Christensen’s [amazon_link id=”0062060244″ target=”_blank” ]The Innovator’s Dilemma.[/amazon_link] Amazon has set up some new areas of business as skunkworks, but in other cases Jeff Bezos simply drove through new activities that would cannibalize existing sales. One example is the introduction of Marketplace, putting other retailers on the same page as Amazon itself.

[amazon_image id=”087584863X” link=”true” target=”_blank” size=”medium” ]Information Rules: A Strategic Guide to the Network Economy[/amazon_image]

The corporate culture sounds awful; I’d never work there. Amazon has become a nasty competitor as it has grown – and the book has an interesting section on its entanglements with competition authorities over e-books. It raises some questions too about the company’s business methods in dealing with both suppliers and smaller competitors – undercutting pricing in nappies, apparently to induce an online diaper supplier to sell out to Amazon; the use of grey markets in high quality goods to get a better price, thereby undermining the viability of the supplier. All, though, in the interests of delivering Amazon customers “everyday low pricing”, a desirable aim but one that simply conflicts with some other desirable aims such as sustaining craft production. This is an unfinished story, as the long term will one day catch up with the short term.

The other big question, not explicitly raised but obvious, is what a post-Jeff Bezos Amazon will be like. That’s no doubt many years away but his driven personality and vision have shaped the company. Succession in these digital giants is clearly a big issue.

All in all, a terrific book for thinking through some of the dilemmas the online world presents, and for thinking about the digital challenge to existing business models. The Jeff Bezos story is amazing too, and by the way he wants to colonise space. That’s not a joke.

Highly recommended book, whether for pleasure or for business students.

Is the US a post-innovation economy?

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[amazon_link id=”0262019922″ target=”_blank” ]Production in the Innovation Economy[/amazon_link] edited by Richard Locke and Rachel Wellhausen is a useful short summary of an interesting inter-disciplinary MIT research project, and is the companion to an earlier volume, [amazon_link id=”0262019914″ target=”_blank” ]Making in America: From Innovation to Market[/amazon_link]. Although entirely US-centric, the research into what is needed for firms to be able to innovate then commercialize and grow is fascinating. All the more so in the light of the mild furore yesterday about Facebook’s purchase of Oculus, which some commentators saw as a signal of the inability of start-ups to grow organically.

[amazon_image id=”0262019922″ link=”true” target=”_blank” size=”medium” ]Production in the Innovation Economy[/amazon_image]

The work, based on existing data sources and a new survey of US manufacturing companies – including high-tech spinouts from MIT, explores a number of potential barriers to turning research into successful US manufacturing entities. The papers in the book cover skills, what it rather coyly calls ‘complementary assets’ but is actually finance to grow past the start-up stage, and a thick, geographically specific ‘ecosystem’ of suppliers. Taking these in turn:

– most manufacturers have no specific high skill needs and have little sustained trouble filling jobs, but a significant minority (15-20%) need people with higher mathematics and computer skills, and team working capability, and find it hard to recruit. Small, innovative start-ups do not have the capacity to train up their own people – they need to hunt for them in the labour market.

– surprisingly, finance to get to the point of being able to manufacture at scale, including a stage of iterative incremental innovation and prototyping, is a major barrier even in the US (and surely all the more so elsewhere). Part of the problem is that VCs have become specialists in specific stages and are usually looking for an out from their stage – in other words, venture capital has become very short term finance, shorter term than needed to grow a successful innovative manufacturing business. Many US businesses now turn to strategic overseas investors in Asia, either their customers or even state-funded entities.

– a third requirement is the presence locally – for the exchange of tacit knowledge – of a thick enough market for components. The geographic co-location of members of a supply chain is becoming a constant theme of the literature on innovation. In the economy of the 1960s and 70s, large vertically integrated companies with their own R&D arms did not have this challenge of finding partners in the supply chain; but all new innovative manufacturers have to source components from suppliers who are prepared to work on the new products.

The specific policy conclusions are written for the US, and do not carry over elsewhere in the same form. But the general principles are very obvious. They all point to the need for government to play a co-ordination role. Whether it is ensuring the system of education, training and apprenticeships serves the needs of new start-ups, co-ordinating finance or tax breaks on the funding gap at the transitional stage of growth, or liaising between firms and with local authorities and educational establishments to achieve the geographic clustering, there is a strategic role for government.

Asian governments are superb at this, including focusing support on some specific sectors (such as energy innovation in China), and I think some European governments do a decent job too. The book is pretty clear, though, that the US government has not adapted its industrial strategy for an economy consisting of smaller innovators, one where it can’t rely on big defence contracts and the likes of Bell Labs to look after the business of growing new ideas into large-scale commercial success. In the US and UK there is still the official delusion that industrial policy is equivalent to pouring a bath of taxpayers’ money in which lame ducks can splash around in unproductive luxury. This book provides a really solid evidence base concerning the barriers to growing small, innovative manufacturers, and is very persuasive about the need for policy action to lower those barriers – otherwise, it implies, the US economy can have superb universities and early stage research but will be nevertheless a post-innovation economy.

A fine innovation economist

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A few days ago Suzanne Scotchmer died. There have been a couple of warm appreciations of her and her work on innovation economics from Joshua Gans and Joel West. Her particular contribution was the argument, well supported by evidence, that the patent system does not incentivise cumulative innovation at all well because it does not share the returns to innovation between the first step and subsequent steps in the cumulative process. In a growing number of instances, such as biotech or digital technologies, successful innovation takes exactly this cumulative form.

I knew Suzanne when I was a graduate student at Harvard in the early 1980s and she was a young assistant professor. Then, as now, economics was very male-dominated and it was unspeakably encouraging to have a female role model who was highly supportive of students – and a normal human being too, warm, funny, with outside interests. (Juliet Schor was another who was at around the same time. Maybe it’s a lapse of my memory but I can’t remember any other women professors in the department at the time.) I last saw Suzanne at the 2009 Global Economic Symposium, when we shared a panel.

Shame on me, I’ve not read her 2004 book [amazon_link id=”0262693437″ target=”_blank” ]Innovation and Incentives[/amazon_link].

[amazon_image id=”0262693437″ link=”true” target=”_blank” size=”medium” ]Innovation and Incentives[/amazon_image]

Her 1991 Journal of Economic Perspectives paper, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law (1991:1, pp 29-41), is well worth reading – it’s a free download. She notes that if the second inventor has some market power, prior agreements to share revenues can overcome the drawback of patent-based incentives. Defining patents quite narrowly can also help. However, she also argues that the problem supports the case for government funding of basic research made freely available to subsequent innovators, without patenting. Here is the conclusion:

“Patent policy is a very blunt instrument trying to solve a very delicate problem. Its bluntness derives largely from the narrowness of what patent breadth can depend on, namely the realized values of the technologies. As a consequence, the prospects for fine-tuning the patent system seem limited, which may be an argument for more public sponsorship of basic research.”

Suzanne’s death is a sad loss.

On being open

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In 1981 the Labour MP George Foulkes drafted the ‘Control of Space Invaders (and other electronic games) Bill’ because he thought it was addictive and causing deviant behaviour. The bill was defeated – but by only 20 votes in the House of Commons.Mr Foulkes was obviously very persuasive in his speech about the effects of games on the young:

“They play truant, miss meals, and give up other normal activity to play “space invaders”. They become crazed, with eyes glazed, oblivious to everything around them, as they play the machines. It is difficult to appreciate unless one has seen it for oneself. I suggest that right hon. and hon. Members who have not seen it should go incognito to an arcade or café in their own areas and see the effect that it is having on young people.”

It’s tempting to laugh, but recall that there are still serious voices urging control over childrens’ use of video games or online access in general. Anybody who watches children using online resources either in play or study will know how enormous the potential is for their learning and creativity. Of course, most schools ban mobile use and constrain use of social media and  internet access, and there are obvious risks to be managed, but it means that the enormous potential is untapped.

For the first chapter or so of [amazon_link id=”1909979015″ target=”_blank” ]Open[/amazon_link] by David Price, I was disappointed, although (because?) it had been praised so enormously by people I respect. The first part sets out the case that we are churning out mass produced children for the post-industrial age, and it isn’t working. The children are as bored as can be, the testing and league tables distort incentives for schools and discourage them from innovating, and by the time they get to 18 young people have been drilled into expecting to be told whatever they need to know to jump through the next hoop. No politician can risk being honest about this. Of course, this is all true. But it’s been known for years, decades even. (I even wrote about it myself in 2001.)

[amazon_image id=”1909979015″ link=”true” target=”_blank” size=”medium” ]Open: How we’ll work, live and learn in the future[/amazon_image]

But before long, I was thoroughly enjoying this book. Part of the enjoyment comes from agreeing so wholeheartedly with what David Price has to say about the need for a complete re-engineering of so many organisations – schools and businesses so that they face outwards, engage with all relevant communities, and above all enable their students or employees to become creative and enthusiastic learners. Schools in particular are set up to do exactly the opposite – testing of individuals is seen as the only way to measure educational success yet it actively discourages collaboration, a key skill in the workplace.

Price urges readers to just get on with remodelling their organisations. “We are beginning to realise that we don’t have to wait for those who govern locally or nationally to act on our behalf. We now have the means to act autonomously.” Of course there are constraints – schools have to jump over the league table and testing hurdles. But there’s scope to just go ahead and remodel the approach to learning beyond that.

The book touches on MOOCs, quoting Arthur C Clarke: “Teachers who can be replaced by a machine should be.” Price, like me, believes that some successors to today’s MOOCs will overturn universities in the way file-sharing did for albums and the record industry. Universities are vital civic and educational institutions but they will need to find new delivery models both in what they offer online and what they offer face-to-face.

There are lots of examples of open organisations in [amazon_link id=”1909979015″ target=”_blank” ]Open[/amazon_link]. I was especially struck by a quotation from Patrick McKenna of Ingenious Media: “We give a lot of our knowledge away… The reason we don’t worry about giving that knowledge away is because most people can’t implement what they know. The capital value of something these days is the ability to implement it rather than to create it originally.” This is a profound point with lots of implications.

Finally, the book notes the disjuncture between life and politics: “If schools are coming directly into competition with the learning opportunities available in the informal social space, it has to be said that this is a pressure which barely registers within the political discourse. The gaping hole in the middle of the public debate on schooling is that we can’t even agree on what schools are actually for.” Preparation for jobs? Child development? National economic competitiveness? Civic cohesion? Policy mushes all of these together and compels children to find their own way through the obstacle course in between them and the thrill of learning. Anybody with a teenager will know how thoroughly they’ve had all the enthusiasm beaten out of them by a decade of compulsory schooling for tests.

The book is slightly prone to educationalese but it’s very clearly written. Even if you start out agreeing – as I do – the many examples are interesting and useful. I’ll be giving this book to quite a few people, I think.

As a final treat, it introduced me to this fabulous course.

 

A not-so-dismal science

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I was just browsing through a book of this title, A Not-so-dismal Science: A Broader View of Economies and Societies, edited by Mancur Olson and Satu Kahkonen, published in 2000. It has some great essays, including Olson’s Big Bills Left on the Sidewalk: Why some nations are rich and others poor (pdf), a must-read for economists in my view.

[amazon_image id=”0198294905″ link=”true” target=”_blank” size=”medium” ]A Not-So-Dismal Science: A Broader View of Economies and Societies[/amazon_image]

This time my eye was caught by Joel Mokyr’s essay, Innovation and its Enemies: the economic and political roots of technological inertia. It starts with a question both simple and profound. If it is primarily markets that determine the allocation of resources (the ‘fundamentalist economics’ assertion), then how does innovation ever occur – because by definition there are no markets for new goods. “Innovation is much more than an economic phenomenon,” Mokyr writes. It’s a superb essay. I’m going to have to re-read the whole book – judging from the dust, I haven’t looked at it for years.