Strategy as Ecology, Marco Iansiti and Roy Levien, 2004
Another article from the March edition of HBR. Iansiti and Levien compare networks of suppliers, distributors, outsourcing firms, makers of related products or services, technology providers, etc. to ecosystems in nature. Certainly not a new concept for anyone who has read up on networks recently, but they carry the analogy further to derive business strategies and insights. An interesting read.
Like an individual species in a biological ecosystem, each member of a business ecosystem ultimately shares the fate of the network as a whole, regardless of that member’s apparent strength. From their earliest days, Wal-Mart and Microsoft—unlike companies that focus primarily on their internal capabilities—have realized this and pursued strategies that not only aggressively further their own interests but also promote their ecosystems’ overall health.
They have done this by creating “platforms”—services, tools, or technologies—that other members of the ecosystem can use to enhance their own performance. Wal-Mart’s procurement system offers its suppliers invaluable real-time information on customer demand and preferences, while providing the retailer with a significant cost advantage over its competitors. (For a breakdown of how Wal-Mart’s network strategy contributes to this advantage, see the exhibit “The Ecosystem Edge.”) Microsoft’s tools and technologies allow software companies to easily create programs for the widespread Windows operating system—programs that, in turn, provide Microsoft with a steady stream of new Windows applications. In both cases, these symbiotic relationships ultimately have benefited consumers—Wal-Mart’s got quality goods at lower prices, and Microsoft’s got a wide array of new computing features—and gave the firms’ ecosystems a collective advantage over competing networks.
Assessing Your Ecosystem’s Health
So what is a healthy business ecosystem? What are the indications that it will continue to create opportunities for each of its domains and for those who depend on it? There are three critical measures of health—for business as well as biological ecosystems.
Productivity. The most important measure of a biological ecosystem’s health is its ability to effectively convert nonbiological inputs, such as sunlight and mineral nutrients, into living outputs—populations of organisms, or biomass. The business equivalent is a network’s ability to consistently transform technology and other raw materials of innovation into lower costs and new products. There are a number of ways to measure this. A relatively simple one is return on invested capital.
Robustness. To provide durable benefits to the species that depend on it, a biological ecosystem must persist in the face of environmental changes. Similarly, a business ecosystem should be capable of surviving disruptions such as unforeseen technological change. The benefits are obvious: A company that is part of a robust ecosystem enjoys relative predictability, and the relationships among members of the ecosystem are buffered against external shocks. Perhaps the simplest, if crude, measure of robustness is the survival rates of ecosystem members, either over time or relative to comparable ecosystems.
Niche Creation. Robustness and productivity do not completely capture the character of a healthy biological ecosystem. The ecological literature indicates that it is also important these systems exhibit variety, the ability to support a diversity of species. There is something about the idea of diversity, in business as well as in biology, that suggests an ability to absorb external shocks and the potential for productive innovation. The best measure of this in a business context is the ecosystem’s capacity to increase meaningful diversity through the creation of valuable new functions, or niches. One way to assess niche creation is to look at the extent to which emerging technologies are actually being applied in the form of a variety of new businesses and products.
Considering the proposition that the biotech industry has entered a phase characterized by many small forms forming alliances/networks with each other, research institutes and pharma multinationals, the analogy seems particularly relevant.
Sunday
Search
Courtesy of Micah Alpern, I now have a search engine on the blog! Unfortunately, I think it only links to the blog homepage, although the link to Google's cached snapshot should be a bit more useful. Also, it only works if Google has actually crawled the link in question. Since those occasions are few and far between, I'm not sure how useful it will turn out to be... Cool, nevertheless.
Saturday
When at first offshoring doesn't succeed
Tough Shift - Lesson in India: not every job translates overseas, Scott Thurm, 2004
In Wednesday's Wall Street Journal, writes about one ValiCert's travails as it tried to offshore programming work, first by hiring Infosys and later by opening its own subsidiary in Bangalore.
In a nutshell, offshoring didn't work because
- ValiCert kept changing the definition or goals of offshored projects. Many projects were cancelled or delayed after months of work. This led to a) Infosys changing team members designated to ValiCert or b) software engineers at ValiCert's subsidiary becoming utterly frustrated
- Offshored projects were usually small parts of larger efforts and required intensive coordination. This approach failed because of difficulties in managing teams spread across 14 time zones, and because a lot of information that was considered intuitive or taken for granted in Silicon Valley was not available in Bangalore.
- Coordination and communication problems led to severe delays, inefficiencies and a breakdown of trust between the Indian and US teams.
Eventually, ValiCert learned how to make profitable use of offshoring and now believes that the company would not have survived without it. If at first ValiCert believed that colleagues would swap work across the globe every 12 hours, helping ValiCert 'put more people on it and get it done sooner,' now it offshores entire projects, such as adapting an entire program to a different operating system. It has also improved its communications flows between operations in India and the US to ease or at least spread fairly the burden of communicating across time zones.
Nevertheless, Brent Haines, in charge of coordinating the US and Indian teams commented that such collaboration requires extensive planning, ... 'something very unnatural to people in software.'
ValiCert merged with Tumbleweed in Feb 2002. The combined Redwood City, Calif., company's 150 engineers today are almost evenly divided among California, the Tumbleweed operation in Bulgaria, and the India office started by ValiCert. In Bulgaria, engineers write and test software, and scan millions of e-mails daily for traces of spam. In India, engineers test software, fix bugs and create new versions of one product. Last September, Tumbleweed released its first product developed entirely in India, a program that lets two computers communicate automatically and securely. Mr. Marur's team had worked on it for over for 18 months. Core development for new products remains in California, where engineers are closer to marketing teams and Tumbleweed's customers.
In Wednesday's Wall Street Journal, writes about one ValiCert's travails as it tried to offshore programming work, first by hiring Infosys and later by opening its own subsidiary in Bangalore.
In a nutshell, offshoring didn't work because
- ValiCert kept changing the definition or goals of offshored projects. Many projects were cancelled or delayed after months of work. This led to a) Infosys changing team members designated to ValiCert or b) software engineers at ValiCert's subsidiary becoming utterly frustrated
- Offshored projects were usually small parts of larger efforts and required intensive coordination. This approach failed because of difficulties in managing teams spread across 14 time zones, and because a lot of information that was considered intuitive or taken for granted in Silicon Valley was not available in Bangalore.
- Coordination and communication problems led to severe delays, inefficiencies and a breakdown of trust between the Indian and US teams.
Eventually, ValiCert learned how to make profitable use of offshoring and now believes that the company would not have survived without it. If at first ValiCert believed that colleagues would swap work across the globe every 12 hours, helping ValiCert 'put more people on it and get it done sooner,' now it offshores entire projects, such as adapting an entire program to a different operating system. It has also improved its communications flows between operations in India and the US to ease or at least spread fairly the burden of communicating across time zones.
Nevertheless, Brent Haines, in charge of coordinating the US and Indian teams commented that such collaboration requires extensive planning, ... 'something very unnatural to people in software.'
ValiCert merged with Tumbleweed in Feb 2002. The combined Redwood City, Calif., company's 150 engineers today are almost evenly divided among California, the Tumbleweed operation in Bulgaria, and the India office started by ValiCert. In Bulgaria, engineers write and test software, and scan millions of e-mails daily for traces of spam. In India, engineers test software, fix bugs and create new versions of one product. Last September, Tumbleweed released its first product developed entirely in India, a program that lets two computers communicate automatically and securely. Mr. Marur's team had worked on it for over for 18 months. Core development for new products remains in California, where engineers are closer to marketing teams and Tumbleweed's customers.
On the European biotech sector
Why does the European biotech sector underperform? Mark Greener, 2004
In its December / January 2004 issue, Eurobusiness (now discontinued) carried a story on the worries of the European biotech sector.
While biotech in Europe shows impressive growth and success, it is definitely underperforming compared to the US industry. The main reason for this, according to Greener is a lack of venture capital.
The European biotech sector is younger and less mature than in the US. Companies are smaller - with market capitalizations that often fall short of investment funds' thresholds; their products are less developed and require more patience from investors; and there are few high-profile success stories yet to encourage vc's.
These drawbacks are exacerbated by risk-averse investors (much funding of European biotech ventures actually comes from US, not European, sources) and a lack of successful, co-ordinated stock exchanges. Most financing comes from partnerships with or acquisitions by large pharma firms.
Also, an aversion to GM food, a difficult regulatory environment, and a lower rate of entrepreneurship don't help.
The problem is, of course, that a lack of funds and success stories can stifle growth and reduce spending on new R&D, thereby endangering the future of the entire biotech - and by extension also pharma - industry.
An aside: There is a vc fund that has adapted it's venturing model to the European market. Instead of investing in 10 firms, hoping that one will be an overwhelming success, it's revenue model is based on, say, 5 out of those 10 companies delivering reasonably solid returns. Now if only I could remember the name of the vc fund and where I read about it...
In its December / January 2004 issue, Eurobusiness (now discontinued) carried a story on the worries of the European biotech sector.
While biotech in Europe shows impressive growth and success, it is definitely underperforming compared to the US industry. The main reason for this, according to Greener is a lack of venture capital.
The European biotech sector is younger and less mature than in the US. Companies are smaller - with market capitalizations that often fall short of investment funds' thresholds; their products are less developed and require more patience from investors; and there are few high-profile success stories yet to encourage vc's.
These drawbacks are exacerbated by risk-averse investors (much funding of European biotech ventures actually comes from US, not European, sources) and a lack of successful, co-ordinated stock exchanges. Most financing comes from partnerships with or acquisitions by large pharma firms.
Also, an aversion to GM food, a difficult regulatory environment, and a lower rate of entrepreneurship don't help.
The problem is, of course, that a lack of funds and success stories can stifle growth and reduce spending on new R&D, thereby endangering the future of the entire biotech - and by extension also pharma - industry.
An aside: There is a vc fund that has adapted it's venturing model to the European market. Instead of investing in 10 firms, hoping that one will be an overwhelming success, it's revenue model is based on, say, 5 out of those 10 companies delivering reasonably solid returns. Now if only I could remember the name of the vc fund and where I read about it...
Bringing innovations to market in networked industries
The New Rules for Bringing Innovations to Market, Bhaskar Chakravorti, 2004
Bhaskar Chakravorti, author of 'The Slow Pace of Fast Change,' discusses the pitfalls of innovation in networked industries in this HBR article. (See also this earlier post.)
Chakravorti bases his argument on game theory and network economics.
When a market is in equilibrium (i.e. Nash equilibrium) every player in a market believes that he or she is making the best possible choices and that every other player is doing the same. Equilibrium in a market lends stability to the players' expectations, validates their choices, and reinforces their behaviors. When an innovation enters the market, it upsets the players' expectations and choices and introduces uncertainty in decision making.
So, once a market reaches equilibrium, it resists new ideas and new products and significantly favors incumbents who maintain the status quo.
A market's hostility to innovations becomes stronger when plazers are interconnected. In a networked market, each participant will switch to a new product only when it believes others will do so, too. ... When America's first transcontinental railroads were built in the 1860's, for example, factories and businesses that were close to waterways did not immediately relocate near railways. They did so only when they felt their customers and suppliers were making the switch, too.
Communications technology provides virtual connections between market participants and can affect adoption of new products. Using these technologies, market participants sent signals about their behavior and allow others to form expectations.
For instance, E. Remington and Sons introduced the first typewriter in 1874, a time when penmanship was still a highly respected skill. Most writers (with the exception of Mark Twain) initially shunned the typewriter. The growth of railroads, telephones, and telegraph lines led to the dispersal of companies and the depersonalization of communications. the typewritten document became the standard for written communications in business. Use of the typewriter spread. Thus, the railroads, the telephone, and the telegraph implicitly increased the speed with which consumers accepted the typewriter.
That influence is a two-edged sword.
Networked markets allow for the rapid diffusion of news, ideas, and, in theory, innovations. But they also erect formidable barriers to the adoption of innovations - primarily because of the interdependencies between players.
This reminds me of Barabasi's work on power laws in networks.
Once enough plazers in a networked market decide to switch to a new product, other players' motivation to do so becomes stronger. Beyond that threshold, the network becomes innovation's ally rather than its foe.
This sounds much like a game theoretical explanation of Shumpeter's 'creative destruction.'
Chakravorti also emphasizes the importance of hubs for innovators. Aligning interests with the most connected industry players gives an innovator access to a large network with very little effort.
While he goes on to recommend a strategy for innovators who are trying to move from one equilibrium to another in order to promote their new products, there is little mention of markets that are not yet in equilibrium. I could imagine that the bioinformatics industry is still too young to have reached a Nash equilibrium and that network ties are not yet stable enough to deter innovation. Or, to put it another way, the biomedical industry experienced two 'waves:' Has the industry reached equilibrium in the second wave yet?
And what will happen to an industry so dependent on, even defined by, innovation once it does reach equilibrium?
Bhaskar Chakravorti, author of 'The Slow Pace of Fast Change,' discusses the pitfalls of innovation in networked industries in this HBR article. (See also this earlier post.)
Chakravorti bases his argument on game theory and network economics.
When a market is in equilibrium (i.e. Nash equilibrium) every player in a market believes that he or she is making the best possible choices and that every other player is doing the same. Equilibrium in a market lends stability to the players' expectations, validates their choices, and reinforces their behaviors. When an innovation enters the market, it upsets the players' expectations and choices and introduces uncertainty in decision making.
So, once a market reaches equilibrium, it resists new ideas and new products and significantly favors incumbents who maintain the status quo.
A market's hostility to innovations becomes stronger when plazers are interconnected. In a networked market, each participant will switch to a new product only when it believes others will do so, too. ... When America's first transcontinental railroads were built in the 1860's, for example, factories and businesses that were close to waterways did not immediately relocate near railways. They did so only when they felt their customers and suppliers were making the switch, too.
Communications technology provides virtual connections between market participants and can affect adoption of new products. Using these technologies, market participants sent signals about their behavior and allow others to form expectations.
For instance, E. Remington and Sons introduced the first typewriter in 1874, a time when penmanship was still a highly respected skill. Most writers (with the exception of Mark Twain) initially shunned the typewriter. The growth of railroads, telephones, and telegraph lines led to the dispersal of companies and the depersonalization of communications. the typewritten document became the standard for written communications in business. Use of the typewriter spread. Thus, the railroads, the telephone, and the telegraph implicitly increased the speed with which consumers accepted the typewriter.
That influence is a two-edged sword.
Networked markets allow for the rapid diffusion of news, ideas, and, in theory, innovations. But they also erect formidable barriers to the adoption of innovations - primarily because of the interdependencies between players.
This reminds me of Barabasi's work on power laws in networks.
Once enough plazers in a networked market decide to switch to a new product, other players' motivation to do so becomes stronger. Beyond that threshold, the network becomes innovation's ally rather than its foe.
This sounds much like a game theoretical explanation of Shumpeter's 'creative destruction.'
Chakravorti also emphasizes the importance of hubs for innovators. Aligning interests with the most connected industry players gives an innovator access to a large network with very little effort.
While he goes on to recommend a strategy for innovators who are trying to move from one equilibrium to another in order to promote their new products, there is little mention of markets that are not yet in equilibrium. I could imagine that the bioinformatics industry is still too young to have reached a Nash equilibrium and that network ties are not yet stable enough to deter innovation. Or, to put it another way, the biomedical industry experienced two 'waves:' Has the industry reached equilibrium in the second wave yet?
And what will happen to an industry so dependent on, even defined by, innovation once it does reach equilibrium?
Thursday
The Bioeconomy and what it means for regional economies
Prospects for a Bioeconomy: The Biomedical Industry and Economic Development, Cinda Herndon-King and Richard S. Seline, 2000
Without many too many facts to fall back on, I have proposed that hi-tech industry industries are moving away from a pure cluster model towards a 'network of competing and cooperating clusters.' This report backs me up as far as the biomedical industry is concerned. There's more on networks of innovation and regions collaborating to compete at the website of New Economy Strategies.
Cinda Herndon-King and Richard Seline analyzed 28 regions in the United States, with a special emphasis on the 4 most important clusters: Boston, San Diego, the Bay Area and Seattle. At the time the report was written, biotech was poised to pick up investments and momentum from the slacking internet bubble economy.
Herndon-King and Seline provide a comprehensive overview of the biomedical industry. They point out the enormous market potential of the health care industry in the U.S., mainly due to a population with a higher life expectancy that is aging overall. However, much of the potential also arises from the fact that genomic pharmaceuticals allow much more personalized healthcare and a much vaster scope of treatments - beginning with highly targeted preventive care.
They cite Mark Dibner and list 7 factors which distinguish the biomedical industry from other high tech sectors:
1. Financing: The start-up costs of business are high, and generally not financed by the entrepreneur
2. Reliance on research base: Most (55%) of biotechnology companies engage in activities which are in the research and development phase only.
3. Time to market: Typically, between five to twelve years is required. Return on investment for early investors is not based on product sales but from increasing valuation of the company, realized upon exit.
4. Regulatory environment: The cost of the the drug development and approval process is estimated at an average of $300 to $500 million per drug. The time required for approvals can be highly variable, and can often depend on factors outside the control of the submitting company.
5. Dependence on patent issues: Attracting investment requires a strong global intellectual property position.
6. Alliances and outsourcing: Due to the high costs of doing business, biotechnology firms extensively leverage outside skills, technology and capital through alliances. Reliance on academic innovation has emerged as the primary factor affecting biotechnology industry cluster devlopment.
7. Influence of public perception and environment.
Two major trends that form a recurring theme throughout the report are:
1. the interrelationship of tools and enabling technology with basic scientific discovery. The distinction between providing equipment or software and conducting basic research is blurred since so much discovery depends on the development of specialized or custom-made new tools.
2. the requirement for interdisciplinary approaches to biomedical research, bioinformatics being a case in point for both trends.
The authors go on to describe 2 phases of the industry:
The first wave business model centered on the 'full integrated pharmaceutical company' that licensed, financed, managed, and fought the federal regulatory labyrinth around (typically) a university patent or paper. This fully-integrated model housed the research, the testing, the manufaturing, and the distribution and sales for all aspects of bringing a drug or product to the market.
The second wave of the biotech industry is best defined by the reliance upon outsourcing and business networks rather than the integration model. Simply, the biotech and life science industry has found alliances, networks among researchers-vendors-suppliers, and a more concentrated and accelerated focus of both the science and the economics to be not just valuable but competitive propositions.
This has implications for regional economies that focus on biotech/biomed:
The Second Wave therefore is permeating regional strategies: proximity is no longer a value proposition in all elements of the lifecycle. Proximity to new ideas, to faculty, to research facilities promises greater innovation (defined as a social process among inputs of the science and outputs of entrepreneurial formation), but as firms mature the proximity demand within a region is challenged. Seattle for instance found in the late 1980s that no strategic marketing firms existed in their region and thus turned to Los Angeles and New York for assistance. Over a three year period, enough demand was created in Seattle that approximately 30 firms were established to serve the growing strategic marketing and sales requirements – many were outpost from Los Angeles and New York, others were home-grown. Currently San Diego has exceeded its manufacturing capacity – land is in short supply and costly; an initiative is underway to partner with border cities in Mexico and communities outside of California for non-essential manufacturing services.
There is a shift from self-contained regional clusters to specialized networked regions (see graph on page 44 of the report).
This is a reflection of changes in the industry itself as it moved from full vertical integration within one firm to a greater reliance on networks and alliances.
Proximity matters but not as it once did - like a fully-integrated company, regions believed that they must manage or control all aspects of the product cycle. With the determination that not every region has all the critical ingredients, more and more expectations arise for networking with other institutions, knowledge, talent and entrepreneurs beyond the local community. Proximity matters because innovation is a social process but not all aspects of the product testing and development must rely on the capacity to 'rub shoulders' with the testing, trials, and manufacturing aspects of the industry.
But the question remains: Which aspects require shoulder rubbing, and which don't?
Without many too many facts to fall back on, I have proposed that hi-tech industry industries are moving away from a pure cluster model towards a 'network of competing and cooperating clusters.' This report backs me up as far as the biomedical industry is concerned. There's more on networks of innovation and regions collaborating to compete at the website of New Economy Strategies.
Cinda Herndon-King and Richard Seline analyzed 28 regions in the United States, with a special emphasis on the 4 most important clusters: Boston, San Diego, the Bay Area and Seattle. At the time the report was written, biotech was poised to pick up investments and momentum from the slacking internet bubble economy.
Herndon-King and Seline provide a comprehensive overview of the biomedical industry. They point out the enormous market potential of the health care industry in the U.S., mainly due to a population with a higher life expectancy that is aging overall. However, much of the potential also arises from the fact that genomic pharmaceuticals allow much more personalized healthcare and a much vaster scope of treatments - beginning with highly targeted preventive care.
They cite Mark Dibner and list 7 factors which distinguish the biomedical industry from other high tech sectors:
1. Financing: The start-up costs of business are high, and generally not financed by the entrepreneur
2. Reliance on research base: Most (55%) of biotechnology companies engage in activities which are in the research and development phase only.
3. Time to market: Typically, between five to twelve years is required. Return on investment for early investors is not based on product sales but from increasing valuation of the company, realized upon exit.
4. Regulatory environment: The cost of the the drug development and approval process is estimated at an average of $300 to $500 million per drug. The time required for approvals can be highly variable, and can often depend on factors outside the control of the submitting company.
5. Dependence on patent issues: Attracting investment requires a strong global intellectual property position.
6. Alliances and outsourcing: Due to the high costs of doing business, biotechnology firms extensively leverage outside skills, technology and capital through alliances. Reliance on academic innovation has emerged as the primary factor affecting biotechnology industry cluster devlopment.
7. Influence of public perception and environment.
Two major trends that form a recurring theme throughout the report are:
1. the interrelationship of tools and enabling technology with basic scientific discovery. The distinction between providing equipment or software and conducting basic research is blurred since so much discovery depends on the development of specialized or custom-made new tools.
2. the requirement for interdisciplinary approaches to biomedical research, bioinformatics being a case in point for both trends.
The authors go on to describe 2 phases of the industry:
The first wave business model centered on the 'full integrated pharmaceutical company' that licensed, financed, managed, and fought the federal regulatory labyrinth around (typically) a university patent or paper. This fully-integrated model housed the research, the testing, the manufaturing, and the distribution and sales for all aspects of bringing a drug or product to the market.
The second wave of the biotech industry is best defined by the reliance upon outsourcing and business networks rather than the integration model. Simply, the biotech and life science industry has found alliances, networks among researchers-vendors-suppliers, and a more concentrated and accelerated focus of both the science and the economics to be not just valuable but competitive propositions.
This has implications for regional economies that focus on biotech/biomed:
The Second Wave therefore is permeating regional strategies: proximity is no longer a value proposition in all elements of the lifecycle. Proximity to new ideas, to faculty, to research facilities promises greater innovation (defined as a social process among inputs of the science and outputs of entrepreneurial formation), but as firms mature the proximity demand within a region is challenged. Seattle for instance found in the late 1980s that no strategic marketing firms existed in their region and thus turned to Los Angeles and New York for assistance. Over a three year period, enough demand was created in Seattle that approximately 30 firms were established to serve the growing strategic marketing and sales requirements – many were outpost from Los Angeles and New York, others were home-grown. Currently San Diego has exceeded its manufacturing capacity – land is in short supply and costly; an initiative is underway to partner with border cities in Mexico and communities outside of California for non-essential manufacturing services.
There is a shift from self-contained regional clusters to specialized networked regions (see graph on page 44 of the report).
This is a reflection of changes in the industry itself as it moved from full vertical integration within one firm to a greater reliance on networks and alliances.
Proximity matters but not as it once did - like a fully-integrated company, regions believed that they must manage or control all aspects of the product cycle. With the determination that not every region has all the critical ingredients, more and more expectations arise for networking with other institutions, knowledge, talent and entrepreneurs beyond the local community. Proximity matters because innovation is a social process but not all aspects of the product testing and development must rely on the capacity to 'rub shoulders' with the testing, trials, and manufacturing aspects of the industry.
But the question remains: Which aspects require shoulder rubbing, and which don't?
Wednesday
Biotech resource
I found a newish industry magazine that covers biotech in India: Biospectrum. They provide a great industry overview, lots of stats and profiles - and best of all, all their back issues are online.
Thanks Reuben, for linking to my blog and motivating me to start posting again!
Thanks Reuben, for linking to my blog and motivating me to start posting again!
Saturday
Cities as drivers of innovation and economic growth
The economy of cities, Jane Jacobs, 1969
Jane Jacobs sees cities as fundamentally different from other economic regions - not as larger and more complicated villages. In her book, she describes an anthropological view of the earliest cities as centers of trade between non-agricultural tribes that develop sophisticated agricultural techniques as they grow. This conflicts with the view traditionally held at the time that hunter/gatherer villages developed agriculture and subsequently grew to become cities.
Jacobs perspective allows a new analysis of cities and their interactions with the rural areas around them. Since she focuses on cities' imports and exports, her's could be seen as simply an input-output model that treats the city (ie. agglomeration economy) as black box. However, the anthropological background she provides and her analysis of divisions of labor within the city go a long way towards opening the black box and understanding it. Her description of entrepreneurship and incremental innovation makes intuitive sense: People doing their job, naturally find ways to improve on certain aspects - mainly through trial and error. If they get positive feedback, they may shift their focus from the original work to elaborating the improvements. One of Jacobs' examples is Mrs. Rosenthal, a New York seamstress. Mrs. Rosenthal was unhappy with the way her dresses fit her customers, so she used her sewing and fitting skills to create bras. She was so successful with this improvement that she went on to give up on sewing dresses and founded Maidenform instead. One of the most important factors in this example is that Mrs. Rosenthal was originally engaged in local work, which she adapted. Maidenform, by contrast became an export business (ie., exporting out of the city of New York). Once the new line of business was firmly established, factories could be set up in rural areas to save costs and improve efficiency. This example is representative of Jacobs's description of the city as a self-reciprocating, open system.
Jacobs emphasizes that this kind of innovation can only happen in cities where there is a high density of people and jobs as well and if a high degree of specialization can be supported by the economy. Since established businesses are constantly being moved to rural areas, the city must create new sources of income, ie. new exports. To achieve this, a vibrant local economy is necessary to serve as the basis for innovation. The inefficiency of cities is an advantage for the trial and error process of incremental innovation: a large variety of different kinds of work is happening in one place, which encourages new combinations; the sustainability of high degrees of specialization lets innovations succeed before they are fully developed, and replication of work means that many instances of trial and error can occur in tandem.
While individual specialization is important, according to Jacobs, cities should not specialize. They need to maintain many different avenues of innovation/trial and error because only a fraction will succeed. Efficiency works against innovation in this case. Some of the most important specializations/innovations that cities provide have been the generic ones that allow new businesses of all kinds to form: venture capitalists, lawyers, printers, leasing of factory equipment, agencies to provide temporary workers, etc.
Even though Jacobs doesn't touch on radical high-tech innovations or consumer-driven innovation (cf. von Hippel's work), she provides a very tangible, practical account of how agglomeration economies work. Her model gives many insights into what it takes to create an agglomeration economy or to revive a stagnating city.
An interview with Jane Jacobs.
Jane Jacobs sees cities as fundamentally different from other economic regions - not as larger and more complicated villages. In her book, she describes an anthropological view of the earliest cities as centers of trade between non-agricultural tribes that develop sophisticated agricultural techniques as they grow. This conflicts with the view traditionally held at the time that hunter/gatherer villages developed agriculture and subsequently grew to become cities.
Jacobs perspective allows a new analysis of cities and their interactions with the rural areas around them. Since she focuses on cities' imports and exports, her's could be seen as simply an input-output model that treats the city (ie. agglomeration economy) as black box. However, the anthropological background she provides and her analysis of divisions of labor within the city go a long way towards opening the black box and understanding it. Her description of entrepreneurship and incremental innovation makes intuitive sense: People doing their job, naturally find ways to improve on certain aspects - mainly through trial and error. If they get positive feedback, they may shift their focus from the original work to elaborating the improvements. One of Jacobs' examples is Mrs. Rosenthal, a New York seamstress. Mrs. Rosenthal was unhappy with the way her dresses fit her customers, so she used her sewing and fitting skills to create bras. She was so successful with this improvement that she went on to give up on sewing dresses and founded Maidenform instead. One of the most important factors in this example is that Mrs. Rosenthal was originally engaged in local work, which she adapted. Maidenform, by contrast became an export business (ie., exporting out of the city of New York). Once the new line of business was firmly established, factories could be set up in rural areas to save costs and improve efficiency. This example is representative of Jacobs's description of the city as a self-reciprocating, open system.
Jacobs emphasizes that this kind of innovation can only happen in cities where there is a high density of people and jobs as well and if a high degree of specialization can be supported by the economy. Since established businesses are constantly being moved to rural areas, the city must create new sources of income, ie. new exports. To achieve this, a vibrant local economy is necessary to serve as the basis for innovation. The inefficiency of cities is an advantage for the trial and error process of incremental innovation: a large variety of different kinds of work is happening in one place, which encourages new combinations; the sustainability of high degrees of specialization lets innovations succeed before they are fully developed, and replication of work means that many instances of trial and error can occur in tandem.
While individual specialization is important, according to Jacobs, cities should not specialize. They need to maintain many different avenues of innovation/trial and error because only a fraction will succeed. Efficiency works against innovation in this case. Some of the most important specializations/innovations that cities provide have been the generic ones that allow new businesses of all kinds to form: venture capitalists, lawyers, printers, leasing of factory equipment, agencies to provide temporary workers, etc.
Even though Jacobs doesn't touch on radical high-tech innovations or consumer-driven innovation (cf. von Hippel's work), she provides a very tangible, practical account of how agglomeration economies work. Her model gives many insights into what it takes to create an agglomeration economy or to revive a stagnating city.
An interview with Jane Jacobs.
Tuesday
Business process outsourcing moves up the value-chain
Special Section: BPO, a global market for services, Knowledge at Wharton, 25 September 2003
Knowledge at Wharton has a special section on business process outsourcing. One of the most interesting articles in the section is about BPO moving up the value-chain.
Cutting costs is not the only reason why outsourcing such tasks makes sense for its clients; it’s also about higher quality of work, says Aggarwal. “Among the more unusual emerging developments is that business process offshoring is not merely a way to reduce cost by migrating core functions,” adds Spohr of A.T. Kearney. “It is also a strategic initiative to take advantage of technological advances and the human capital available offshore to fundamentally restructure an organization’s operating model.”
These new business models are necessary for the efficiency gains from new communications technologies to finally kick in.
An example of a BPO firm that has moved beyond call-centers and crunching code is Evalueserve with headquarters in Bermuda, a subsidiary in New Jersey and its main operating plant just outside of New Delhi.
Evalueserve provides services like patent writing, evaluation and assessment of their commercialization potential for law firms and entrepreneurs. Its market research services are aimed at top-rung financial services firms, to which it provides analysis of investment opportunities and business plans. Another major offering is multilingual services -- Evalueserve trains and qualifies employees to communicate in Chinese, Spanish, German, Japanese and Italian, among other languages. That skill set has opened market opportunities in Europe and elsewhere, especially with global corporations.
Dieter Ernst's work focuses on how outsourcing manufacturing influences the spread of knowledge around the world. Outsourcing services should have an even more dramatic effect, since transportation is even easier and cheaper. Also, outsourcing manufacturing seems to be mainly cost-driven, with companies in developed countries outsourcing to the developed and developing world. BPO - or service outsourcing more generally - can go in any direction. Globally competitive companies in Taiwan, India and Israel can get R&D from subsidiaries/joint-ventures/partners in Silicon Valley. The ultimate R&D outsourcing example is InnoCentive. High-end professional medical and legal services are already being outsourced by U.S. firms and governments.
So far, India is in the best position to take advantage of the BPO trend - and seems likely to keep it for some time.
The expansion of the labor force by more than 2 million new English-speaking college graduates each year will provide plenty of room for growth. Also, the labor arbitrage between India and the U.S. is so significant that it will take a long time for it to catch up. What’s more, any rise in wage costs is getting offset by declining telecommunication rates (some 30% over the last couple of years), thanks to improvements in infrastructure and technology.
Of course, others are competing to get into the business as well. China is one contender, although some say that a) it can't overcome the language barrier and b) the domestic market's service requirements will use up all the available talent. Mauritius wants to capitalize on its linguistic advantages and is getting help from India to catch up. A solid telecoms infrastructure, tax incentives, and compromises on visas and advance work permits should help. New Yorkers' parking tickets are processed in Ghana. VietnaPhilippineslipines, central European countries and many others are competing for part of the cross-border business that is expected to grow to $178.5 billion by 2005. Indian BPO companies themselves have started outsourcing as costs rise in their own country.
Knowledge at Wharton has a special section on business process outsourcing. One of the most interesting articles in the section is about BPO moving up the value-chain.
Cutting costs is not the only reason why outsourcing such tasks makes sense for its clients; it’s also about higher quality of work, says Aggarwal. “Among the more unusual emerging developments is that business process offshoring is not merely a way to reduce cost by migrating core functions,” adds Spohr of A.T. Kearney. “It is also a strategic initiative to take advantage of technological advances and the human capital available offshore to fundamentally restructure an organization’s operating model.”
These new business models are necessary for the efficiency gains from new communications technologies to finally kick in.
An example of a BPO firm that has moved beyond call-centers and crunching code is Evalueserve with headquarters in Bermuda, a subsidiary in New Jersey and its main operating plant just outside of New Delhi.
Evalueserve provides services like patent writing, evaluation and assessment of their commercialization potential for law firms and entrepreneurs. Its market research services are aimed at top-rung financial services firms, to which it provides analysis of investment opportunities and business plans. Another major offering is multilingual services -- Evalueserve trains and qualifies employees to communicate in Chinese, Spanish, German, Japanese and Italian, among other languages. That skill set has opened market opportunities in Europe and elsewhere, especially with global corporations.
Dieter Ernst's work focuses on how outsourcing manufacturing influences the spread of knowledge around the world. Outsourcing services should have an even more dramatic effect, since transportation is even easier and cheaper. Also, outsourcing manufacturing seems to be mainly cost-driven, with companies in developed countries outsourcing to the developed and developing world. BPO - or service outsourcing more generally - can go in any direction. Globally competitive companies in Taiwan, India and Israel can get R&D from subsidiaries/joint-ventures/partners in Silicon Valley. The ultimate R&D outsourcing example is InnoCentive. High-end professional medical and legal services are already being outsourced by U.S. firms and governments.
So far, India is in the best position to take advantage of the BPO trend - and seems likely to keep it for some time.
The expansion of the labor force by more than 2 million new English-speaking college graduates each year will provide plenty of room for growth. Also, the labor arbitrage between India and the U.S. is so significant that it will take a long time for it to catch up. What’s more, any rise in wage costs is getting offset by declining telecommunication rates (some 30% over the last couple of years), thanks to improvements in infrastructure and technology.
Of course, others are competing to get into the business as well. China is one contender, although some say that a) it can't overcome the language barrier and b) the domestic market's service requirements will use up all the available talent. Mauritius wants to capitalize on its linguistic advantages and is getting help from India to catch up. A solid telecoms infrastructure, tax incentives, and compromises on visas and advance work permits should help. New Yorkers' parking tickets are processed in Ghana. VietnaPhilippineslipines, central European countries and many others are competing for part of the cross-border business that is expected to grow to $178.5 billion by 2005. Indian BPO companies themselves have started outsourcing as costs rise in their own country.
R&D in Brazil
This week, the Knowledge Economy team of the Development Gateway is focusing on Brazil as a potential tech and innovation powerhouse.
Brazil has over the past years been receiving increasing public and private investments aimed at boosting and expanding innovative activities in the country.
Brazil is the largest recipient of foreign direct investment (FDI) in Latin America, and Brazilian entrepreneurs point to FDI as a major source of new technology transfer and to the licensing of foreign technology as a major form of acquiring new technology.
When it comes to the internal capacity to absorb and create new technologies, -while Brazil has been broadening access to education at all levels-, the Brazil Competitiveness meeting hosted by the World Economic Forum in June this year pointed out that only a relatively small number of high-tech professionals are graduating. The Forum recommended that Brazil increase the number of graduating professionals and improve education, primarily by increasing specialization in fields related to the more competitive industries of the country. The Forum also pointed out other weaknesses of Brazil's innovation system, among them insufficient linkages between universities and other actors.
This again points to the importance of building local absorptive capacity rather than relying too heavily on foreign direct investment. (See also a Foreign Policy article, which Reuben pointed out.)
I recently read an article describing the Xylella fastidiosa Genome Project. The Brazilian scientists in the project made use of Europe's distributed team organization for sequencing the genome and adapted it to their own conditions - thereby greatly improving on the European model in the author's opinion. Spreading the research across numerous labs (34 sequencing labs, 1 bioinformatics lab and collaboration with 2 European labs) also helped to train more scientist in biotechnology, and to create a better base/more absorptive capacity for future research projects and the biotech industry. The choice of the organism to sequence was also significant - a citrus pathogen, which is of great interest to academics and agribusiness.
At the time, the project created quite a stir: Brazil was the first developing country to join genome sequencing as a serious player; theirs was the first plant genome to be sequenced. From EMBnet news (April 2000):
In two years, Brazil (or at least São Paulo state) has gone from essentially nothing to being one of the larger producers of sequence data in the world. It has done so not by investing massively in a large sequencing facility, but by bringing together a large number of individual labs, many of which are already using these new data and know-how in their own research. In this way, the genome projects have already had a major impact on Brazilian science.
The world has not really taken notice yet, but I would bet that within another year or two ONSA and the HCGP will have achieved the same recognition as TIGR and CGAP. Bioinformaticians and genome scientists take note!
Brazil has over the past years been receiving increasing public and private investments aimed at boosting and expanding innovative activities in the country.
Brazil is the largest recipient of foreign direct investment (FDI) in Latin America, and Brazilian entrepreneurs point to FDI as a major source of new technology transfer and to the licensing of foreign technology as a major form of acquiring new technology.
When it comes to the internal capacity to absorb and create new technologies, -while Brazil has been broadening access to education at all levels-, the Brazil Competitiveness meeting hosted by the World Economic Forum in June this year pointed out that only a relatively small number of high-tech professionals are graduating. The Forum recommended that Brazil increase the number of graduating professionals and improve education, primarily by increasing specialization in fields related to the more competitive industries of the country. The Forum also pointed out other weaknesses of Brazil's innovation system, among them insufficient linkages between universities and other actors.
This again points to the importance of building local absorptive capacity rather than relying too heavily on foreign direct investment. (See also a Foreign Policy article, which Reuben pointed out.)
I recently read an article describing the Xylella fastidiosa Genome Project. The Brazilian scientists in the project made use of Europe's distributed team organization for sequencing the genome and adapted it to their own conditions - thereby greatly improving on the European model in the author's opinion. Spreading the research across numerous labs (34 sequencing labs, 1 bioinformatics lab and collaboration with 2 European labs) also helped to train more scientist in biotechnology, and to create a better base/more absorptive capacity for future research projects and the biotech industry. The choice of the organism to sequence was also significant - a citrus pathogen, which is of great interest to academics and agribusiness.
At the time, the project created quite a stir: Brazil was the first developing country to join genome sequencing as a serious player; theirs was the first plant genome to be sequenced. From EMBnet news (April 2000):
In two years, Brazil (or at least São Paulo state) has gone from essentially nothing to being one of the larger producers of sequence data in the world. It has done so not by investing massively in a large sequencing facility, but by bringing together a large number of individual labs, many of which are already using these new data and know-how in their own research. In this way, the genome projects have already had a major impact on Brazilian science.
The world has not really taken notice yet, but I would bet that within another year or two ONSA and the HCGP will have achieved the same recognition as TIGR and CGAP. Bioinformaticians and genome scientists take note!
Saturday
Biz-history lesson
The Company: A Short History of a Revolutionary Idea, John Micklethwait, Adrian Wooldridge, 2003
HBS Working Knowledge just alerted me to this new book by 2 Economist editors.
“The most important organization in the world is the company: the basis of the prosperity of the West and the best hope for the future of the rest of the world.” And so John Micklethwait and Adrian Wooldridge, editors at the Economist, begin their account of the rise of this most “remarkable institution.” Reporting on over 5,000 years’ worth of company history, from the Sumerian families who traded along the Euphrates and Tigris rivers in Mesopotamia in 3000 BC to today’s multinational corporations, the authors provide an absorbing, but surprisingly concise, narrative of the influences of the company in shaping our world. Filled with fascinating literary and cultural references, the reader is guided on a journey that includes the medieval guilds of northern Europe, the British and Dutch chartered and joint-stock companies, and nineteenth century American railroad companies.
HBS Working Knowledge just alerted me to this new book by 2 Economist editors.
“The most important organization in the world is the company: the basis of the prosperity of the West and the best hope for the future of the rest of the world.” And so John Micklethwait and Adrian Wooldridge, editors at the Economist, begin their account of the rise of this most “remarkable institution.” Reporting on over 5,000 years’ worth of company history, from the Sumerian families who traded along the Euphrates and Tigris rivers in Mesopotamia in 3000 BC to today’s multinational corporations, the authors provide an absorbing, but surprisingly concise, narrative of the influences of the company in shaping our world. Filled with fascinating literary and cultural references, the reader is guided on a journey that includes the medieval guilds of northern Europe, the British and Dutch chartered and joint-stock companies, and nineteenth century American railroad companies.
How technology aids innovation
Experimentation Matters: Unlocking the Potential of New Technologies for Innovation, Stefan Thomke, 2003.
Some time ago HBS Working Knowledge carried an interview with Stefan Thomke about his book, 'Experimentation Matters: Unlocking the Potential of New Technologies for Innovation.'
Thomke emphasizes that experimentation is vital to innovation and survival in today's business world. Computer modeling and simulation, rapid prototyping, and combinatorial technologies drive down the marginal cost of experimentation and allow companies to create more learning more rapidly.
He also proposes that it may make sense to shift experimentation from producers to customers: some companies have abandoned their efforts to understand exactly what products their customers want and have instead equipped them with tools to design and develop their own new products, ranging from minor modifications to major new innovations. The user-friendly tools, often integrated into a “toolkit” package, deploy new technologies (e.g., computer simulation and rapid prototyping) to make innovation faster, less expensive and, most importantly, better, as customers run “what-if” experiments themselves.
This suggests that since experimentation can be moved up and down the supply chain (relatively) easily, the technology matters more than the location. More on this when I've read the book...
Some time ago HBS Working Knowledge carried an interview with Stefan Thomke about his book, 'Experimentation Matters: Unlocking the Potential of New Technologies for Innovation.'
Thomke emphasizes that experimentation is vital to innovation and survival in today's business world. Computer modeling and simulation, rapid prototyping, and combinatorial technologies drive down the marginal cost of experimentation and allow companies to create more learning more rapidly.
He also proposes that it may make sense to shift experimentation from producers to customers: some companies have abandoned their efforts to understand exactly what products their customers want and have instead equipped them with tools to design and develop their own new products, ranging from minor modifications to major new innovations. The user-friendly tools, often integrated into a “toolkit” package, deploy new technologies (e.g., computer simulation and rapid prototyping) to make innovation faster, less expensive and, most importantly, better, as customers run “what-if” experiments themselves.
This suggests that since experimentation can be moved up and down the supply chain (relatively) easily, the technology matters more than the location. More on this when I've read the book...
Trust, alliances, and innovation in supply chain management
HBS Working Knowledge: Operations: The Missing Link in Supply Chains: People
Research on (global) supply chain management has proven to be a great resource for my work, even though I concentrate on innovation rather than production. There are many similar issues in the two fields: the importance of alliances, the necessity to create trust between different organizations etc.
This panel discussion convened by the Harvard Business Review raises some of these issues. Particularly interesting is David Burt's proposal that trust can be established between organizations, not just individuals. I'm not convinced - and he concedes that he doesn't any evidence yet - but the idea is intriguing...
The panelists also point out that smart contracting is essentially the basis for building trust. Master contracts can avoid repeated drawn-out and possibly nasty negotiations, letting partners focus on cooperation. Another suggestion was to avoid penalties that simply punish the party that violates the agreement. Instead, have the violating party pay the money into an account that is then used for the benefit of the alliance. This way the alliance benefits from enforcement. Simple penalties just provide an incentive to 'catch out' the other person.
Robert Lynch brings up another issue of supply chain management: Buyers are rewarded for cutting costs, not for gaining innovation from the supply chain. He cites a study by Burt in which responding firms on average say that 35% of their innovation comes from the supply chain. He contrasts this number to the 60% that companies like Toyota achieve. Evidently, supply chain management can create strong incentives for suppliers to innovate - or not.
Research on (global) supply chain management has proven to be a great resource for my work, even though I concentrate on innovation rather than production. There are many similar issues in the two fields: the importance of alliances, the necessity to create trust between different organizations etc.
This panel discussion convened by the Harvard Business Review raises some of these issues. Particularly interesting is David Burt's proposal that trust can be established between organizations, not just individuals. I'm not convinced - and he concedes that he doesn't any evidence yet - but the idea is intriguing...
The panelists also point out that smart contracting is essentially the basis for building trust. Master contracts can avoid repeated drawn-out and possibly nasty negotiations, letting partners focus on cooperation. Another suggestion was to avoid penalties that simply punish the party that violates the agreement. Instead, have the violating party pay the money into an account that is then used for the benefit of the alliance. This way the alliance benefits from enforcement. Simple penalties just provide an incentive to 'catch out' the other person.
Robert Lynch brings up another issue of supply chain management: Buyers are rewarded for cutting costs, not for gaining innovation from the supply chain. He cites a study by Burt in which responding firms on average say that 35% of their innovation comes from the supply chain. He contrasts this number to the 60% that companies like Toyota achieve. Evidently, supply chain management can create strong incentives for suppliers to innovate - or not.
Thursday
Production networks vs. innovation networks
Knowledge flows and industrial clusters: An analytical review of literature, Rakesh Basant, 2002
Looking for an overview of the literature on industrial clusters as they relate to knowledge transfer and innovation, I came across this very helpful review by Rakesh Basant. Besides providing a great overview, Rakesh pointed me in the direction of Dieter Ernst's work - an analysis of global production networks (loosely: the network of global supply chains). Looking at production networks also involved analyzing the knowledge flows that accompany transfer of machinery, technology licenses, and finance. Apparently, as global networks increase and ICTs become more readily available, more knowledge is being codified that would earlier remain tacit: a boost for innovation across distance. However, another study by Cassiolato seems to provide evidence that MNCs (dominant sources of knowledge in Ernst's model) may have little incentive to involve local actors in knowledge intensive activities, thereby limiting cooperation across distance to production, rather than innovation.
Looking for an overview of the literature on industrial clusters as they relate to knowledge transfer and innovation, I came across this very helpful review by Rakesh Basant. Besides providing a great overview, Rakesh pointed me in the direction of Dieter Ernst's work - an analysis of global production networks (loosely: the network of global supply chains). Looking at production networks also involved analyzing the knowledge flows that accompany transfer of machinery, technology licenses, and finance. Apparently, as global networks increase and ICTs become more readily available, more knowledge is being codified that would earlier remain tacit: a boost for innovation across distance. However, another study by Cassiolato seems to provide evidence that MNCs (dominant sources of knowledge in Ernst's model) may have little incentive to involve local actors in knowledge intensive activities, thereby limiting cooperation across distance to production, rather than innovation.
Wednesday
Network metaphor
Metaphors we live by, George Lakoff, Mark Johnson, 2003 [1980]
Reading 'Metaphors we live by' reminded me of some of the difficulties of working with network models of the economy. A network is a theoretical structure composed of nodes and links between them. Often individual people, groups or organizations are defined as nodes and the relations between them are the links. But it is possible - and sometimes useful - to define things the other way around. This basically means that looking at networks often presupposes that form or structure is more important than content.
At the same time, talking about networks is a way of understanding any number of things in the world around us, i.e. we apply the network to many different kinds of content and expect to understand that content better. Often the qualitative aspects of nodes and links are just as interesting and relevant as their structure. Incorporating these aspects into a formal model of networks seems like a theoretical/logical contradiction. However, it fits an intuitive understanding model of networks better. This may be because the internet and the World Wide Web - and our own personal experiences with it - shape the meaning of 'network' more strongly than the formal mathematical definition.
Reading 'Metaphors we live by' reminded me of some of the difficulties of working with network models of the economy. A network is a theoretical structure composed of nodes and links between them. Often individual people, groups or organizations are defined as nodes and the relations between them are the links. But it is possible - and sometimes useful - to define things the other way around. This basically means that looking at networks often presupposes that form or structure is more important than content.
At the same time, talking about networks is a way of understanding any number of things in the world around us, i.e. we apply the network to many different kinds of content and expect to understand that content better. Often the qualitative aspects of nodes and links are just as interesting and relevant as their structure. Incorporating these aspects into a formal model of networks seems like a theoretical/logical contradiction. However, it fits an intuitive understanding model of networks better. This may be because the internet and the World Wide Web - and our own personal experiences with it - shape the meaning of 'network' more strongly than the formal mathematical definition.
Sunday
Biotech knowledge and market exchange
Inter-institutional spillover effects in the commercialization of bioscience, Lynne Zucker, Michael Darby and Jeff Armstrong, ISSR Working Paper, vol. 6, no. 3, 1994.
In this study, Zucker, Darby and Armstrong lay out a proposition that partly contradicts a study on knowledge networks by Liebeskind et al. Both studies try to answer the question of how scientific knowledge flows into biotech firms.
Summary
Liebeskind et al. propose that firms source their knowledge through social networks to overcome the problems of market failure and inefficiencies involved in internalizing knowledge. On the other hand, Zucker et al. propose that there is a market exchange at work, especially for knowledge that is successfully commercialized. They work from the observation that much work in rDNA research is characterized by natural excludability, e.g. acquiring it requires working together with someone in a lab and/or a time-consuming effort to learn new skills. This results in intellectual capital for the discovering scientists. This intellectual capital diminishes as the new skills and knowledge diffuse throughout the industry. However, during an initial phase, companies that want to commercialize the intellectual capital must employ the services of the scientist who embody it. Scientists can be formally employed or hired as consultants. Links can also be less evident: full or partial ownership, membership in a scientific advisory board, etc.
Zucker, Darby and Armstrong find that formal affiliation or less formal links (joint publications and various forms of compensation) with 'star' scientists are a significant success factor for biotechnology enterprises. This, together with the presence of scientific and financial links, suggests that there is a market exchange at work.
Market or social network and hierarchy?
Which is true? Do biotech firms source their knowledge primarily through market exchange or primarily through social networks and the internal hierarchy?
Both seem to be relevant to some extent. Many of the market exchange mechanisms described above seem designed to bring a 'star' scientist within the firm boundaries, so that knowledge can then be transferred through the hierarchy. Social networks become relevant when scientific knowledge embodied in leading scientists is scarce and human mobility is limited (e.g. limits on the amount of time professors can spend consulting or formal full-time employment of scientists in a firm ). Where lack of mobility hinders market exchanges, social networks become more important. Also, Liebeskind et al. point out that it is very difficult for firms to evaluate newly available knowledge. Social networks play an important role in assessing knowledge before formal evaluations have ascertained its value or relevance to a specific firm.
Finally, social networks and market exchange are not entirely independent in this case. In both cases a great deal of trust is necessary for successful cooperation between a 'star' scientist and a biotech firm. This trust is probably established to a large degree through the social network: the norms and values of the scientific community provide a basis for cooperation; the reputation of the cooperating partners and initial informal contacts will likely be established through the network. A great deal of knowledge exchange mediated through the social network will probably precede a market exchange, which involves closer cooperation and knowledge, which has greater direct commercial benefits.
Apparently, the market only comes into play where factors such as tacitness and absorptive capacity reduce the market failure generally encountered in trading knowledge (Arrow).
Questions of location
Liebeskind et al. found that most successful partnerships involved a 'star' scientist who lived in the same region as the participating biotech enterprise was located. They mention that a few stars have been affiliated with NBEs (new biotechnology enterprises) outside California or published with NBEs outside of their region. Though they seem to be few cases, it would be interesting to see whether they were as successful as cases of local cooperation. Data may be available at the ISSR site...
New rules of work
A few days ago I wrote about Frances Cairncross's book 'The death of distance'. One of the chapters that I didn't mention dealt with new forms of work in the networked economy. Traditional lifetime employment has been disappearing for a long time now. In a continuation of this development, more and more people are engaging in non-traditional employment: freelancing, entrepreneurship, personnel "leasing" and many others.
Cairncross specifically mentioned that firms will pay a high premium for top talent, especially since the most highly qualified knowledge workers will be scarce and demand for them will be worldwide. 'Star' scientists fall squarely in this category. Zucker, Darby and Armstrong mention a study finding that bioscientists act as individual actors, as opposed to acting as agents of their primary ties, whether to the university or the firm (Zucker, Brewer, Oliver, and Liebeskind, 1993). These bioscientists can exercise their expertise independently primarily because they are recognized as having excellent "scientific taste" in the selection of rescues problems and using exceptional care and expertise in exuding that research. They use their 'scientific taste' to advise firms on the relative merit of different lines of research - certainly an example of intellectual capital that has characteristics of excludability, since this 'scientific taste' is highly tacit, embodied knowledge based to a large extent on personal experience.
In this study, Zucker, Darby and Armstrong lay out a proposition that partly contradicts a study on knowledge networks by Liebeskind et al. Both studies try to answer the question of how scientific knowledge flows into biotech firms.
Summary
Liebeskind et al. propose that firms source their knowledge through social networks to overcome the problems of market failure and inefficiencies involved in internalizing knowledge. On the other hand, Zucker et al. propose that there is a market exchange at work, especially for knowledge that is successfully commercialized. They work from the observation that much work in rDNA research is characterized by natural excludability, e.g. acquiring it requires working together with someone in a lab and/or a time-consuming effort to learn new skills. This results in intellectual capital for the discovering scientists. This intellectual capital diminishes as the new skills and knowledge diffuse throughout the industry. However, during an initial phase, companies that want to commercialize the intellectual capital must employ the services of the scientist who embody it. Scientists can be formally employed or hired as consultants. Links can also be less evident: full or partial ownership, membership in a scientific advisory board, etc.
Zucker, Darby and Armstrong find that formal affiliation or less formal links (joint publications and various forms of compensation) with 'star' scientists are a significant success factor for biotechnology enterprises. This, together with the presence of scientific and financial links, suggests that there is a market exchange at work.
Market or social network and hierarchy?
Which is true? Do biotech firms source their knowledge primarily through market exchange or primarily through social networks and the internal hierarchy?
Both seem to be relevant to some extent. Many of the market exchange mechanisms described above seem designed to bring a 'star' scientist within the firm boundaries, so that knowledge can then be transferred through the hierarchy. Social networks become relevant when scientific knowledge embodied in leading scientists is scarce and human mobility is limited (e.g. limits on the amount of time professors can spend consulting or formal full-time employment of scientists in a firm ). Where lack of mobility hinders market exchanges, social networks become more important. Also, Liebeskind et al. point out that it is very difficult for firms to evaluate newly available knowledge. Social networks play an important role in assessing knowledge before formal evaluations have ascertained its value or relevance to a specific firm.
Finally, social networks and market exchange are not entirely independent in this case. In both cases a great deal of trust is necessary for successful cooperation between a 'star' scientist and a biotech firm. This trust is probably established to a large degree through the social network: the norms and values of the scientific community provide a basis for cooperation; the reputation of the cooperating partners and initial informal contacts will likely be established through the network. A great deal of knowledge exchange mediated through the social network will probably precede a market exchange, which involves closer cooperation and knowledge, which has greater direct commercial benefits.
Apparently, the market only comes into play where factors such as tacitness and absorptive capacity reduce the market failure generally encountered in trading knowledge (Arrow).
Questions of location
Liebeskind et al. found that most successful partnerships involved a 'star' scientist who lived in the same region as the participating biotech enterprise was located. They mention that a few stars have been affiliated with NBEs (new biotechnology enterprises) outside California or published with NBEs outside of their region. Though they seem to be few cases, it would be interesting to see whether they were as successful as cases of local cooperation. Data may be available at the ISSR site...
New rules of work
A few days ago I wrote about Frances Cairncross's book 'The death of distance'. One of the chapters that I didn't mention dealt with new forms of work in the networked economy. Traditional lifetime employment has been disappearing for a long time now. In a continuation of this development, more and more people are engaging in non-traditional employment: freelancing, entrepreneurship, personnel "leasing" and many others.
Cairncross specifically mentioned that firms will pay a high premium for top talent, especially since the most highly qualified knowledge workers will be scarce and demand for them will be worldwide. 'Star' scientists fall squarely in this category. Zucker, Darby and Armstrong mention a study finding that bioscientists act as individual actors, as opposed to acting as agents of their primary ties, whether to the university or the firm (Zucker, Brewer, Oliver, and Liebeskind, 1993). These bioscientists can exercise their expertise independently primarily because they are recognized as having excellent "scientific taste" in the selection of rescues problems and using exceptional care and expertise in exuding that research. They use their 'scientific taste' to advise firms on the relative merit of different lines of research - certainly an example of intellectual capital that has characteristics of excludability, since this 'scientific taste' is highly tacit, embodied knowledge based to a large extent on personal experience.
Saturday
Brain Drain from Europe
Europe and the challenge of the brain drain, IPTS Report, vol. 29, Sami Mahroum, 1998
The brain drain is often treated as a problem of developing countries. This article looks at the migration of highly skilled scientist from Europe to the United States. There is a case that developing countries may gain a net profit from the brain drain thanks to income from remittances. More recently, brain circulation has been discovered as an important source of investment and development.
These patterns don't hold for Europe, however. Remittances aren't a relevant source of income, and - most markedly in the case of the UK - scientists who move to the United States tend to stay there. It has become ever more difficult for Europe to establish and maintain centers of excellence in cutting-edge research. Just a few months ago, the Swiss pharmaceutical Novartis, decided to headquarter all R&D in the Boston area. In terms of retaining star scientists, Europe may actually end up doing worse than, say India, Brazil or China, since few new opportunities are opening up to attract talent back. The article cites Switzerland as an exception to the rule. Yet, as the Novartis example shows, Switzerland may succeed in attracting foreign scientists, but faces similar problems as the rest of Europe in repatriating its own scientists and in retaining research leadership.
Since working with star scientists is crucial to commercial success, especially in the biotech industry (Zucker, Darby, Brewer, 1994), the brain drain of top scientists places Europe at an immediate disadvantage.
The brain drain is often treated as a problem of developing countries. This article looks at the migration of highly skilled scientist from Europe to the United States. There is a case that developing countries may gain a net profit from the brain drain thanks to income from remittances. More recently, brain circulation has been discovered as an important source of investment and development.
These patterns don't hold for Europe, however. Remittances aren't a relevant source of income, and - most markedly in the case of the UK - scientists who move to the United States tend to stay there. It has become ever more difficult for Europe to establish and maintain centers of excellence in cutting-edge research. Just a few months ago, the Swiss pharmaceutical Novartis, decided to headquarter all R&D in the Boston area. In terms of retaining star scientists, Europe may actually end up doing worse than, say India, Brazil or China, since few new opportunities are opening up to attract talent back. The article cites Switzerland as an exception to the rule. Yet, as the Novartis example shows, Switzerland may succeed in attracting foreign scientists, but faces similar problems as the rest of Europe in repatriating its own scientists and in retaining research leadership.
Since working with star scientists is crucial to commercial success, especially in the biotech industry (Zucker, Darby, Brewer, 1994), the brain drain of top scientists places Europe at an immediate disadvantage.
Friday
Biotech knowledge sourcing
Social networks, learning, and flexibility: sourcing scientific knowledge in new biotechnology firms, ISSR Working Paper, vol. 6, no. 4, Julia Liebeskind, Amalya Oliver, Lynne Zucker, Marilynn Brewer, 1994. Published in Organization Science, Jul/Aug 1996, vol. 7, no.4, p. 428-443.
Lynne Zucker was recommended to me as someone who has extensively studied cooperation and innovation in the biotechnology industry. She is probably best known for her work together with Michael Darby on the role of 'star' scientists in the biotechnology industry. It was through their work that I came across this paper. (This requires access to JSTOR. An alternative is to download the working paper.)
Liebeskind et al. treat a different aspect of biotech firms. How do they get their most important input: knowledge. The various forms of contracts and alliances to secure supply chains are relatively well understood by economists where manufacturing industries are concerned. These market-based forms of exchange, however, don't seem to work for firms that need to source science-based knowledge in a hypercompetitive environment.
Summary
Traditional transaction-costs theory analyzes the costs and benefits of internal, hierarchical exchanges vs. external, market-based exchanges. In the first case, exchange depends on rules set by managers and enforced by managerial authority down through the hierarchy of the firm. In the second case, fairness in exchange is assured by price competition or by contract. In situations of high uncertainty, and/or asset specificity internal exchanges tend to be more efficient because the market mechanism and ex ante contracting cannot allocate costs and benefits fairly. (Based on Coase and Williamson.)
However, in fast-changing industries, external knowledge-sourcing may be more efficient than internal sourcing despite the transaction-costs argument above. According to Zucker: While bureaucratic authority is by definition located within the firm's boundaries, expert authority depends on the information resources available to an individual, and not on the authority of office. Thus authority may be located within the organization... but when an external expert authority market can provide information that leads to greater effectiveness, then expert authority tends to migrate into the market. Teece argues that it may not be optimal for a firm (i.e. hierarchy) to seek to internalize numerous exchanges when technology is changing rapidly because the value of internalizing those exchanges may change rapidly under conditions of technological uncertainty, resulting in excess sunk costs. And Camagni adds that, when technology is changing rapidly, firms lose their ability to assess the value of information accurately, because they cannot learn and institutionalize appropriate assessment routines in short periods of time. Hierarchies are just not suited to efficient distribution of fast-changing technological knowledge.
Markets are not well-suited either. As Arrow demonstrated, markets for information are subject to failure, because an efficient price cannot be established for knowledge without revealing its contents. This problem of appropriation can be solved by patenting, secrecy or licensing and first-mover advantages. However, during the innovation process and where exchange of knowledge is necessary to advance innovation, these options are of limited value.
In addition to the traditional forms of exchange (market and hierarchy), a third form has been proposed: social networks. Shared norms and values serve to ensure fairness in exchange, without resort to market pricing, contracts, or managerial authority.
- Unlike hierarchies, but like markets, social networks involve exchanges between legally distinct entities. Network exchanges, like market exchanges, are external to the firm. Therefore, these exchanges are not formally excluded from the rule of law, as are exchanges which take place within hierarchies.
- Unlike markets, but like hierarchies, social networks support exchanges without using competitive pricing or legal contracting. Specifically, exchanges between individuals or organizations which are conducted through social networks have no need for price competition or legal contracting because the shared norms of the exchange partners alone will ensure that outcomes are fair.
This form of exchange is based on trust created through socialization and tradition, repeated exchange, or mechanisms such as posting a bond, testing, or performance monitoring. Biotech firms have access to a particularly useful network. Since the knowledge they use is strongly science-based, they work closely with academic researchers. As Blau and Crane pointed out, there are very strong norms that regulate intellectual property in the academic research network. This significantly reduces the main problem of external exchange.
The authors' own summary:
Where expert information is necessary external sourcing through networks is more promising. Where appropriation becomes too sensitive an issue, internal exchange is better suited. Firms may prefer to use social networks, rather than markets or their won hierarchies (i) for governing exchanges of information or knowledge which (ii) is potentially but uncertainly valuable, (iii) which is appropriable, and (iv) whose production is characterized by human capital immobility.
What might this mean for global innovation networks?
Knowledge sourcing through academic networks would seem to encourage global cooperation in biotech innovation. The academic research network already maintains global links and is probably one of the few global networks that shares such strong norms and values. As the proportion of co-authored papers rises, the network is becoming denser. Other trust-based networks that have fulfilled a similar role to overcome market failures in the past have been families and ethnic groups. Here, as with academic-entrepreneurial cooperation, the boundaries of individual firms are blurred. More recently, another global professional network has received attention: programmers, e.g. the LINUX community. Eric von Hippel has written several papers about such user-communities who share a strong set of common values and also drive innovation in a certain market.
Lynne Zucker was recommended to me as someone who has extensively studied cooperation and innovation in the biotechnology industry. She is probably best known for her work together with Michael Darby on the role of 'star' scientists in the biotechnology industry. It was through their work that I came across this paper. (This requires access to JSTOR. An alternative is to download the working paper.)
Liebeskind et al. treat a different aspect of biotech firms. How do they get their most important input: knowledge. The various forms of contracts and alliances to secure supply chains are relatively well understood by economists where manufacturing industries are concerned. These market-based forms of exchange, however, don't seem to work for firms that need to source science-based knowledge in a hypercompetitive environment.
Summary
Traditional transaction-costs theory analyzes the costs and benefits of internal, hierarchical exchanges vs. external, market-based exchanges. In the first case, exchange depends on rules set by managers and enforced by managerial authority down through the hierarchy of the firm. In the second case, fairness in exchange is assured by price competition or by contract. In situations of high uncertainty, and/or asset specificity internal exchanges tend to be more efficient because the market mechanism and ex ante contracting cannot allocate costs and benefits fairly. (Based on Coase and Williamson.)
However, in fast-changing industries, external knowledge-sourcing may be more efficient than internal sourcing despite the transaction-costs argument above. According to Zucker: While bureaucratic authority is by definition located within the firm's boundaries, expert authority depends on the information resources available to an individual, and not on the authority of office. Thus authority may be located within the organization... but when an external expert authority market can provide information that leads to greater effectiveness, then expert authority tends to migrate into the market. Teece argues that it may not be optimal for a firm (i.e. hierarchy) to seek to internalize numerous exchanges when technology is changing rapidly because the value of internalizing those exchanges may change rapidly under conditions of technological uncertainty, resulting in excess sunk costs. And Camagni adds that, when technology is changing rapidly, firms lose their ability to assess the value of information accurately, because they cannot learn and institutionalize appropriate assessment routines in short periods of time. Hierarchies are just not suited to efficient distribution of fast-changing technological knowledge.
Markets are not well-suited either. As Arrow demonstrated, markets for information are subject to failure, because an efficient price cannot be established for knowledge without revealing its contents. This problem of appropriation can be solved by patenting, secrecy or licensing and first-mover advantages. However, during the innovation process and where exchange of knowledge is necessary to advance innovation, these options are of limited value.
In addition to the traditional forms of exchange (market and hierarchy), a third form has been proposed: social networks. Shared norms and values serve to ensure fairness in exchange, without resort to market pricing, contracts, or managerial authority.
- Unlike hierarchies, but like markets, social networks involve exchanges between legally distinct entities. Network exchanges, like market exchanges, are external to the firm. Therefore, these exchanges are not formally excluded from the rule of law, as are exchanges which take place within hierarchies.
- Unlike markets, but like hierarchies, social networks support exchanges without using competitive pricing or legal contracting. Specifically, exchanges between individuals or organizations which are conducted through social networks have no need for price competition or legal contracting because the shared norms of the exchange partners alone will ensure that outcomes are fair.
This form of exchange is based on trust created through socialization and tradition, repeated exchange, or mechanisms such as posting a bond, testing, or performance monitoring. Biotech firms have access to a particularly useful network. Since the knowledge they use is strongly science-based, they work closely with academic researchers. As Blau and Crane pointed out, there are very strong norms that regulate intellectual property in the academic research network. This significantly reduces the main problem of external exchange.
The authors' own summary:
Where expert information is necessary external sourcing through networks is more promising. Where appropriation becomes too sensitive an issue, internal exchange is better suited. Firms may prefer to use social networks, rather than markets or their won hierarchies (i) for governing exchanges of information or knowledge which (ii) is potentially but uncertainly valuable, (iii) which is appropriable, and (iv) whose production is characterized by human capital immobility.
What might this mean for global innovation networks?
Knowledge sourcing through academic networks would seem to encourage global cooperation in biotech innovation. The academic research network already maintains global links and is probably one of the few global networks that shares such strong norms and values. As the proportion of co-authored papers rises, the network is becoming denser. Other trust-based networks that have fulfilled a similar role to overcome market failures in the past have been families and ethnic groups. Here, as with academic-entrepreneurial cooperation, the boundaries of individual firms are blurred. More recently, another global professional network has received attention: programmers, e.g. the LINUX community. Eric von Hippel has written several papers about such user-communities who share a strong set of common values and also drive innovation in a certain market.
Wednesday
Life and the internet
The death of distance: how the communications revolution is changing our lives, Frances Cairncross, 2001
In 'The death of distance,' Frances Cairncross of The Economist set out to analyze as many facets as possible of the internet in our lives. Her book was initially published in 1999, though she thoroughly revised it for the 2001 edition. Two (or worse, four) years are an eternity in internet time, so it is all the more remarkable that 'The death of distance' remains interesting and relevant. Cairncross covers social and economic topics from the design of homes and new work modes to global trade and network economics.
Firm structure and alliances
In the 1990s there was a marked increase in the number of alliance between firms. This trend was reinforced through the availability of the internet and the world wide web.
The Internet gives companies new incentives to work together: to build a trading hub, say, or to offer links to one another's products on their Web sites. Alliances provide an insurance policy against risk - the risk of new technology and the risk of new business models. They also allow companies to deepen their relationship with customers by offering them bundles of products, some created by alliance partners. On top of all these incentives, the Internet provides the means. It enables the construction of links not just between the folk at the top of two allied companies, but at many levels on the way down.
Openness becomes a corporate strategy as companies allow customers and suppliers unprecedented access to their databases, staff, and inner workings. New opportunities for building alliances and relationships demand greater trust in corporate life. Learning to manage these new relationships in novel ways will clearly be an important - perhaps the most important - competitive advantage for businesses in the new century.
Similarly, a study by Powell et al. found that managing R&D alliances had the beneficial side-effect of building a firm's competence in alliance management in general and thereby improving its competitiveness. In addition, companies increased their reputation as a trustworthy partner the more they engaged in alliance - another gain in competitiveness. As a firm becomes a more valued and more connected alliance partner, it moves closer to the center of the information network in the industry.
Technologically enabled alliances began with companies using proprietary systems to give suppliers or customers access to their databases. However, installing these systems was associated with very high costs and a risk of being locked in with the wrong partners. The internet introduced a cheaper, more flexible and often more user-friendly method of sharing data.
Cairncross (like David and Chakravorti) emphasizes the importance of adapting business models to technology - and points out the radical changes that the internet has facilitated. However, she also says that this process is taking place much faster than for earlier innovations because a) the Internet is being adopted much faster than earlier technologies, and b) there is a greater awareness of the potential of technological change to increase efficiency and a more focused search for ways to make it do so. In a 'reverse product cycle' these efficiency gains can spur further technological improvements or even new product development.
For most companies the road-to-Damascus moment comes when they realize that the Internet offers a way to reorient the entire business so that customers at one end of the chain and suppliers at the other are linked seamlessly together.
Knowledge and innovation
Cairncross's description of the organizational changes in supply chain management suggests that business model innovation is as dramatic as technological innovation. Each builds on the other: On the one hand, firms adapt to exploit new technologies as efficiently as possible. On the other hand, direct customer feedback is a significant driver of further technological innovation.
It seems to me that this may have consequences for the location of innovation. If customer feedback is channeled through electronic systems, this may improve the chances of conducting cutting-edge innovation outside the dominant industry cluster (e.g. Silicon Valley). Although few studies have been done so far on the cooperation of industry clusters, an analysis of the medical instruments industry showed that lack of customer contact and feedback was a significant factor in the failure to keep up technologically in a more distant and technologically less advanced location.
Cairncross points out that collaborative working was the Internet's original function back in the days of the ARPANET.
Goods and services
The distinction between goods and services is no longer clear.
Three distinctions were important in the past. First, manufacturing produced a tangible object; services did not. Second, manufacturing operations could be at a distance from the final consumer; service operations could not. Third, manufactured goods could be mass-produced; services had to be individually created. Now, manufacturing is becoming increasingly intangible, more manufacturing is tailored to the individual's tastes, more services are being produced at a distance, and more services are being mass produced.
Cairncross introduces a new categorization: in the future it will be more important whether a product requires physical delivery or whether it is 'weightless,' ie. digitally deliverable.
The fact that immediacy and the need for personal contact may become less important for some services but more so for some products will probably also be important for innovation in these two domains. While immediacy and personal contact might be seen as drivers of innovation, it appears that the exact opposite is happening. Services have traditionally engaged in very little R&D. Now, they are catching up; especially those services that are mass-produced are benefiting from a large increase in R&D.
Service industries have traditionally been slower to innovate than manufacturing, but some are now more innovative than manufacturers and concentrate on making similar improvements, in quality, market, and range.
The rest
The book covers many more aspects from politics and government to private and social life. Some of Cairncross's conclusion seem a bit rosy, especially when compared to her very balanced analysis of economic and business topics. Well worth a read.
In 'The death of distance,' Frances Cairncross of The Economist set out to analyze as many facets as possible of the internet in our lives. Her book was initially published in 1999, though she thoroughly revised it for the 2001 edition. Two (or worse, four) years are an eternity in internet time, so it is all the more remarkable that 'The death of distance' remains interesting and relevant. Cairncross covers social and economic topics from the design of homes and new work modes to global trade and network economics.
Firm structure and alliances
In the 1990s there was a marked increase in the number of alliance between firms. This trend was reinforced through the availability of the internet and the world wide web.
The Internet gives companies new incentives to work together: to build a trading hub, say, or to offer links to one another's products on their Web sites. Alliances provide an insurance policy against risk - the risk of new technology and the risk of new business models. They also allow companies to deepen their relationship with customers by offering them bundles of products, some created by alliance partners. On top of all these incentives, the Internet provides the means. It enables the construction of links not just between the folk at the top of two allied companies, but at many levels on the way down.
Openness becomes a corporate strategy as companies allow customers and suppliers unprecedented access to their databases, staff, and inner workings. New opportunities for building alliances and relationships demand greater trust in corporate life. Learning to manage these new relationships in novel ways will clearly be an important - perhaps the most important - competitive advantage for businesses in the new century.
Similarly, a study by Powell et al. found that managing R&D alliances had the beneficial side-effect of building a firm's competence in alliance management in general and thereby improving its competitiveness. In addition, companies increased their reputation as a trustworthy partner the more they engaged in alliance - another gain in competitiveness. As a firm becomes a more valued and more connected alliance partner, it moves closer to the center of the information network in the industry.
Technologically enabled alliances began with companies using proprietary systems to give suppliers or customers access to their databases. However, installing these systems was associated with very high costs and a risk of being locked in with the wrong partners. The internet introduced a cheaper, more flexible and often more user-friendly method of sharing data.
Cairncross (like David and Chakravorti) emphasizes the importance of adapting business models to technology - and points out the radical changes that the internet has facilitated. However, she also says that this process is taking place much faster than for earlier innovations because a) the Internet is being adopted much faster than earlier technologies, and b) there is a greater awareness of the potential of technological change to increase efficiency and a more focused search for ways to make it do so. In a 'reverse product cycle' these efficiency gains can spur further technological improvements or even new product development.
For most companies the road-to-Damascus moment comes when they realize that the Internet offers a way to reorient the entire business so that customers at one end of the chain and suppliers at the other are linked seamlessly together.
Knowledge and innovation
Cairncross's description of the organizational changes in supply chain management suggests that business model innovation is as dramatic as technological innovation. Each builds on the other: On the one hand, firms adapt to exploit new technologies as efficiently as possible. On the other hand, direct customer feedback is a significant driver of further technological innovation.
It seems to me that this may have consequences for the location of innovation. If customer feedback is channeled through electronic systems, this may improve the chances of conducting cutting-edge innovation outside the dominant industry cluster (e.g. Silicon Valley). Although few studies have been done so far on the cooperation of industry clusters, an analysis of the medical instruments industry showed that lack of customer contact and feedback was a significant factor in the failure to keep up technologically in a more distant and technologically less advanced location.
Cairncross points out that collaborative working was the Internet's original function back in the days of the ARPANET.
Goods and services
The distinction between goods and services is no longer clear.
Three distinctions were important in the past. First, manufacturing produced a tangible object; services did not. Second, manufacturing operations could be at a distance from the final consumer; service operations could not. Third, manufactured goods could be mass-produced; services had to be individually created. Now, manufacturing is becoming increasingly intangible, more manufacturing is tailored to the individual's tastes, more services are being produced at a distance, and more services are being mass produced.
Cairncross introduces a new categorization: in the future it will be more important whether a product requires physical delivery or whether it is 'weightless,' ie. digitally deliverable.
The fact that immediacy and the need for personal contact may become less important for some services but more so for some products will probably also be important for innovation in these two domains. While immediacy and personal contact might be seen as drivers of innovation, it appears that the exact opposite is happening. Services have traditionally engaged in very little R&D. Now, they are catching up; especially those services that are mass-produced are benefiting from a large increase in R&D.
Service industries have traditionally been slower to innovate than manufacturing, but some are now more innovative than manufacturers and concentrate on making similar improvements, in quality, market, and range.
The rest
The book covers many more aspects from politics and government to private and social life. Some of Cairncross's conclusion seem a bit rosy, especially when compared to her very balanced analysis of economic and business topics. Well worth a read.
Tuesday
Slow pace of fast change
Bhaskar Chakravorti, author of 'The slow pace of fast change: bringing innovations to market in a connected world,' recently gave an interview in Ubiquity that provides a good introduction to his work.
Paul David and others have made the point that it takes a long time for innovations to fulfill their economic potential, especially when the innovation involves a general use technology. For example, the main productivity gains from the introduction of electricity were achieved when firms started moving machines around on the factory floor to create a more efficient workflow. However, before that could happen, firms not only had to invest in electrifying their production plants, they also had to invent an entirely new business model.
Chakravorti takes this argument one step further. In an interconnected world it is often not sufficient that firms adapt to new technology one by one; to benefit from a new technology different organizations (often public and private) need to coordinate their activities.
If you dial 911 from your home phone and you forget to say where you are or you collapse, the emergency system will be able to find you because there's an address tied to your phone. But if you are on a cell phone ... there's no address attached to it and the 911 systems will have no information popping up on their screens.
You need the wireline players to upgrade their networks, because they connect from the cell phone that works into the 911 call centers. The 911 call centers need to upgrade their systems so that the latitude and longitude data shows up on their computer screens. All parties must make investments. Simply putting the pressure on the wireless system is not enough. This is a classic example of the basic dilemma that I talk about in the book. You have the technology to solve the problem, but it will take a long time for that technology to translate into fast change, in terms of plugging this hole in our national security system, because all the different parties must coordinate their choices.
As a game theorist interested in networks, Chakravorti works on the mechanisms that can bring about the necessary coordination, identifying individual players' choices and incentive structures to work out a strategy that will nudge everybody in a common direction.
Paul David and others have made the point that it takes a long time for innovations to fulfill their economic potential, especially when the innovation involves a general use technology. For example, the main productivity gains from the introduction of electricity were achieved when firms started moving machines around on the factory floor to create a more efficient workflow. However, before that could happen, firms not only had to invest in electrifying their production plants, they also had to invent an entirely new business model.
Chakravorti takes this argument one step further. In an interconnected world it is often not sufficient that firms adapt to new technology one by one; to benefit from a new technology different organizations (often public and private) need to coordinate their activities.
If you dial 911 from your home phone and you forget to say where you are or you collapse, the emergency system will be able to find you because there's an address tied to your phone. But if you are on a cell phone ... there's no address attached to it and the 911 systems will have no information popping up on their screens.
You need the wireline players to upgrade their networks, because they connect from the cell phone that works into the 911 call centers. The 911 call centers need to upgrade their systems so that the latitude and longitude data shows up on their computer screens. All parties must make investments. Simply putting the pressure on the wireless system is not enough. This is a classic example of the basic dilemma that I talk about in the book. You have the technology to solve the problem, but it will take a long time for that technology to translate into fast change, in terms of plugging this hole in our national security system, because all the different parties must coordinate their choices.
As a game theorist interested in networks, Chakravorti works on the mechanisms that can bring about the necessary coordination, identifying individual players' choices and incentive structures to work out a strategy that will nudge everybody in a common direction.
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