Different forms of innovation

Dev Patnaik has a great metaphor for needs-driven innovation in his Business Week piece Needs Solutions = Innovation:

In the words of one designer at Ford Motor (F), “I keep begging the marketing guys: Don’t tell me you want a bridge. Show me the canyon you want to cross.”

He also has a good example of the different forms of innovation:

Let’s say you’re looking for ways to improve store efficiency, and you observe that the clerk is having trouble getting boxes from a high shelf. You conclude that the clerk needs a ladder. A ladder certainly works, but what if you frame it this way, asking, What does the clerk need to get boxes from a high shelf? A ladder is but one of several possible solutions. Lowering the shelves and rearranging the boxes is another. You may find many more. Reaching a box is a need. Getting a ladder is a solution.

My commentary: a ladder is a technological solution; lowering the shelves and rearranging the boxes is an organizational solution.
We don’t always need technological solutions.
Nor do we necessarily need to solve the immediate problem. One should first ask why we need to cross the canyon. If it is simply to gather firewood, then another solution might be needed. If it is on the road to El Dorado, then let’s think about bridges.
I would also warn against two narrow a view of needs-driven innovation. I’ve long agreed with Prahalad & Hamel that innovation came from “infusing products irresistible functionality or, better yet, creating products that customers need but have not yet even imagined.” But sometimes it takes the creation of something totally new before people can envision how it can be applied to meet yet unimagined needs. Innovation, as Patnaik points out, is a robust interplay of new ideas (technological and non-technological) and needs.
Companies who undertstand this succeed. And countries who gear their policies to that reality prosper. Those who emphasis one part of the equation over another don’t.
This is why we need to insure we have a balanced innovation policy in the US if we are to succeed in the I-Cubed Economy.

Sad state of statistics

A story in this morning’s Washington Post (“Measuring the Economy May Not Be as Simple as 1, 2, 3”) gives us a heads-up on the latest statistical controversy:

The Census Bureau tomorrow will release the latest statistics on poverty in the United States, the income level of an average household and the number of Americans still lacking health insurance.
Don’t believe the numbers.
A growing chorus of experts and politicians is raising questions about the data that frame Americans’ understanding of their nation’s well-being. From poverty levels to health insurance, inflation to personal savings, widely accepted statistics are overstating some problems and understating others, miscounting people, and sending policymakers down blind alleys.

One example of a blind alley:

When Congress returns in September, the House Ways and Means Committee will try to put together legislation to raise personal savings through tax credits and other incentives. But according to David Malpass, chief global economist at Bear Stearns & Co., the United States is accumulating savings hand over fist. The country’s pool of liquid savings grew by $1.5 trillion last year, he said, and U.S. households remain the world’s largest creditor, with $37 trillion in financial assets.
The problem, Malpass said, is that the official savings rate measure does not consider economic gains from patents, innovation, capital gains or land appreciation.

In part, this problem (especially capital gains and land appreciation) can be solved by the movement in accounting to switch from historical costs to fair market value. While this will add realism to the numbers (since current worth is usually very different from cost), it will also add volatility since cost is a fixed number but current value fluctuates – as anyone who has watched the day-by-day and minute-by-minute gyrations of their 401(k) knows.
Accounting for intangibles (patents, innovation) has others difficulties, as outlined in our white paper Reporting Intangibles: A Hard Look at Improving Business Information in the US (see earlier posting for a summary). Given the problems with valuing some of the “softer” intangibles, such as leadership and an innovative culture, I doubt that we will ever be able to include all intangibles in the economic statistics. However, a certain portion of “intangible goods” such as patents can be assigned a value and therefore deserve to included.
It will not, however, be easy. Current valuations of patents are not necessarily very good (witness the controversy over suspected inflation of the value of patent donations). And patents are one of the most concrete types of intangibles.
Thus, bringing our economic statistics into the I-Cubed Economy will be daunting task – but do-able. In the meantime, that the Post’s advice: don’t believe the numbers. Or, better yet, take them with a grain of salt.
FYI – for Paul Krugman’s take on the irrelevancy of many economic statistics to current economic reality, see Summer of Our Discontent – New York Times.

Hollywood’s jurisdictional advantage – and “sticky jobs”

According to the Los Angeles Times, “Movies, Shmovies — TV’s Taking Over L.A.”, Hollywood is experiencing the

biggest boom ever in Los Angeles television production, one that is rapidly turning Tinseltown into a TV town. While Hollywood’s nomadic film business has gravitated toward cheaper U.S. and foreign locales, television production has become the bedrock of the Los Angeles entertainment economy.

The reason why?

With its production infrastructure and proximity to talent, Los Angeles is the location of choice. Stars working on a regular series prefer to stay close to home, and producers want to be near writers who may be needed for quick rewrites.

In other words, the TV production process is just enough different from the movie production process to create a continued jurisdictional advantage for Hollywood. It is that one difference – the on-going production process – that makes L.A. a more desirable location.
This is a perfect example of where a geographically-connected network is required in the production process – as opposed to a geographically-indifferent process.
Likewise, this slight difference in the production process creates a set of geographically “sticky” jobs: actors want to work close to where they live, production personnel need to be near where the actors are living, writers need to be nearby, etc.
We need to understand more about how these small differences in the prodcution process create “sticky” jobs.
– – –
Interestingly, California state political leaders seem to be responding to the decline in movie production rather than the rise in TV production. According to the New York Times:
California Considers Tax Breaks for Filming – New York Times

For the first time since a handful of immigrant New Yorkers moved west to Hollywood seeking cheap land for their movie studios, so many motion pictures are being made outside California that state leaders are poised to enact subsidies to keep productions from leaving.
The state’s dominance in entertainment production has been eroding for years, as filmmakers and television producers gobbled up generous tax incentives in Louisiana, New Mexico, Illinois and other states, and pursued tax breaks, cheaper labor and favorable exchange rates as far away as Canada, Eastern Europe and Asia.

Of course, the movie studios are all in favor of subsidies. And they are used to getting them from other states. As the NY Times story goes on to relate:

Canada provides a 16 percent refundable tax credit on labor costs, with no cap; the provinces of Ontario and British Columbia add 18 percent more, while Manitoba offers a whopping 45 percent credit for labor costs, according to the California Film Commission.
In the United States, 14 states have passed or expanded incentives for production this year alone.
But Louisiana remains the leader in enticements to the film and television industry. The state offers a tax credit of 15 percent of a production’s total costs, even it is only partly shot in Louisiana, and an additional 20 percent of a film’s in-state payroll. A revised credit, which takes effect in January, will apply only to spending in Louisiana but will rise to 25 percent of spending, plus 10 percent of payroll.

Why does this all sound familiar? States try to lure production to their locality with tax breaks. As jurisdictional advantage shifts (in part due to the actions of others to build up their own jurisdictional advantage and localized assets; in part due to the changing nature of the production process), localities try to retain the industry through direct subsidies — rather than either shift to the new area of advantage or re-build the local assets that gave them the advantage in the first place.
Smokestack chasing comes to the creative industries!
As Maryann Feldman pointed out in her paper and presentation to Athena Alliance’s policy forum, Constructing Jurisdictional Advantage, the use of local tax incentives to smokestack chase is ultimately a losing game. It becomes a race to the bottom, since everyone can give a tax break. No lasting jurisdictional advantage is created.
There are other, more productive ways to follow a low-cost strategy, Feldman has argued. These would include actions that permanently lower the cost of going business in a location – rather than temporary subsidies to a particular business.
Better yet is what she calls a strategy of “deliberately constructing jurisdictional advantage by building on existing, not easily replicated resources and complementing private sector activities.”
I have long maintained that since the resources needed for success in the I-Cubed Economy include a talented workforce and a knowledge-sharing, innovation infrastructure, localities would do much better to invest in these activities. Subsidies (tax breaks or direct subsidies) may under limited circumstances (and I stress, “limited”) be beneficial in helping foster an agglomeration of localized knowledge assets (often mistakenly referred to as a “cluster”). Those circumstance are when a particular asset is missing or underdeveloped. But these types of subsidies are best seen as strategic investments – and must be undertaken with forethought and planning.
Otherwise, subsidies simply contribute to a footloose environment. AS Feldman remarks, “these types of operations are frequently the first to be closed when the cost structure changes.”
Given the boom in TV production in LA, maybe the politicians can resist the temptation to take the easy step of providing tax breaks. I wholehearted understand their concern and support their goals of preserving middle-class jobs. I simply think the means they are using to reach that goal will ultimately be unproductive.

Reinventing locational advantage – the case of Cornwall

One key to economic success of a location is its ability to re-invent its competitive advantage. New York City, Boston and Silicon Valley are all used as example of places that have consistently re-invented themselves to adapt to changing economics. Now add Cornwall, England to that list, according to the New York Times These Days Surf’s Up on Cornwall’s Northern Coast:

Cornwall, which was once celebrated for its more elderly pursuits – Cornish teas, watercolor galleries, coastal walks and seaside gardens – is now considered one of the hip places to visit in England, no matter what your age. With numerous beaches for all levels of surfing, an outpost of the modern Tate Gallery in St. Ives, and the environmentally avant-garde Eden Project in St. Austell, Cornwall is increasingly becoming a popular family destination, particularly for those families with painfully trendy teenagers.


A scary statement:

Only about half of this year’s high school graduates have the reading skills they need to succeed in college, and even fewer are prepared for college-level science and math courses, according to a yearly report from ACT, which produces one of the nation’s leading college admissions tests.
The report, based on scores of the 2005 high school graduates who took the exam, some 1.2 million students in all, also found that fewer than one in four met the college-readiness benchmarks in all four subjects tested: reading comprehension, English, math and science.

(from Many Going to College Aren’t Ready, Report Finds – New York Times)
How can the United States prosper in the I-Cubed Economy when half the college-bound high-school graduates don’t have the reading skills necessary for college? In addition, not all high school graduates take the ACT in preparation for college. But almost all high school graduates will need some form of training and education beyond high school. If the college-bound student are doing poorly, these non-college tracked students must really be in trouble.
And so are we.

Customers message to Detroit

News flash for Detroit: make better cars.
WSJ.com – Car Owners Value Quality Over Cost, Survey Suggests:

A survey to be released today of U.S. vehicle owners indicates that while this summer’s “employee-pricing” deals may give auto makers short-term sales gains, improving quality is more important in the long run.

The survey referred to is the University of Michigan’s American Customer Satisfaction Index – run by Professor Claes Fornell. His take on what Detroit needs to do:

Customer satisfaction with U.S. automobile nameplates has improved, but nevertheless falls further behind competition from Japan and Korea. Rebates, low cost financing, and employee discounts to the public have led to higher sales and ACSI scores for U.S. automakers, but they have also taken a toll on profits. In contrast, the rising satisfaction with foreign cars is due to improvements in quality and customization. Price promotions usually have a positive effect on customer satisfaction, but it is generally not large or sustainable. Some US nameplates have also increased advertising touting their superior customer satisfaction. It is difficult to see how Chevrolet (with an ACSI score near the bottom of the industry), for example, can benefit from such advertising: People know how satisfied/dissatisfied they are. It is unlikely that any amount of advertising will change their attitude. A better strategy would probably have been to move dollars from advertising to product improvement instead. It is still not clear that Detroit is taking customer satisfaction, or the lack thereof, seriously enough.

As the Wall Street Journal story points out “U.S. auto makers spent an average of $4,239 a vehicle on incentives in July, compared with $2,372 for European brands and $1,619 for Asian brands, according to Autodata Corp.”
Deja vu, anyone? Didn’t we go through this before? Detroit spends money on marketing; competitors spend money on product improvement. Detroit has even brought back Lee Iacocca as its corporate spokesperson (“You forget the most important part – the deal”).
Why is it when we are supposedly moving into the I-Cubed economy, we keep re-fighting the battles of the 70s and 80s? Our public policy is stuck in that time period (see Going beyond math and science). And now it seems that the corporate strategy of a key US industry is stuck as well.
As Santayana said “Those who cannot remember the past are condemned to repeat it.”

Striving for simplicity

Apropos yesterday’s posting on the need for simple designs (USA Today doesn’t get it) comes this wonderful piece from Gerry McGovern, “Simplicity is hard work”. Gerry is one of the clearest thinkers around on website design and content. He also publishes a weekly newsletter “New Thinking” which I strongly recommend (click here to subscribe). The following is the article in full:

Simplicity is hard work
Simplicity is in the eye of the beholder. What is simple to the creator is rarely so simple to the customer.
I recently bought a Philips CD burner. Its software was difficult to install. What I wanted to do was copy music I had bought from Apple iTunes. When I finally managed to complete the installation, it wouldn’t let me do that. Thus, I wasted about 30 minutes installing and uninstalling the software.
I decided to try iTunes support. There were simple instructions about how to copy songs onto a CD. I followed them. I was able to simply copy songs using the Apple software and the Philips CD burner.
Philips currently has a marketing campaign called “sense and simplicity”. I checked it up on its website. The first sentence reads, “The digital revolution is supposed to have made our lives easier, but studies have shown that’s not the case.” How true.
In the middle of the page that this text comes from is a large animation that is constantly in motion, making it very difficult to read the text. It is ironic that text which is championing simplicity should be cluttered by a totally unnecessary and highly distracting animation. Whoever designed this page certainly doesn’t understand simplicity very well.
Apple understands simplicity. Its products live simplicity. Practically every Apple product I have ever owned has been a pleasure to use. iTunes and iPod are simple, elegant and intuitive.
I keep noticing advertising campaigns now by organizations that are telling us how simple their products and services are. I don’t believe them because my experience is that while many talk simplicity, very few practice it.
I’m sure that within Philips there is a genuine belief that it is important to make their products as simple as possible to use. However, there is a big difference between marketing your products as simple to use and making them genuinely simple.
Simplicity is hard. It’s expensive to do well. “Our experience is that for every mouse click we take out of the user experience, 20 things have to happen in our software behind the scenes,” states Brad Treat, Chief Executive of SightSpeed.
You are the worst judge of whether your website or product is simple. You know your website. You designed it. Remember, a potential customer who has never been at your website before will spend less than one minute figuring out your homepage.
We outsource what we don’t think is a core activity. Support is obviously not seen as a core activity by most organizations, since it is outsourced so much. Well, people ring up support because there is complexity in their lives (something doesn’t work). They are hoping that someone will bring back simplicity (a vain hope in my experience).
I was once told by a manager of a software company that customers were complaining that they couldn’t find anything on the support section of the website. The response of the technical writers was that the customers weren’t searching hard enough.
To achieve simplicity an organization needs to be genuinely customer-focused. Extra investment will be required, as well as a special commitment from designers and management. Is it worth it? Certainly, organizations such as Apple and Google are showing that simplicity can become a genuine competitive advantage.
Gerry McGovern
Gerry McGovern provides website content management solutions