Rediscovering the “Skunkworks”

Seems like every so often we need to re-discover some old ideas. For example, we are re-fighting all the battles from the 1980’s over science and technology policy and funding. Now, it seems that business (or at least the business press) has re-discovered a key element in our innovation-system: the skunkworks (or to use the more dignified term, the “innovation lab”). Here is Business Week’s latest praise of skunkworks – “Mosh Pits” Of Creativity:

The Razr, Motorola’s (MOT ) half-inch-thick, ultralight cell phone, broke a few rules in the industry when it appeared late last year. It’s impossibly compact, simple to operate, and elegant, with an artfully hidden antenna and impressive photographic capabilities. The phone marked a sleek detour from the drive toward bulky features, such as powerful storage devices and high-power cameras, that were fattening up phones and preoccupying rival cell-phone makers. No wonder the Razr has sold a breathtaking 12.5 million units in less than a year.
But Motorola also had to break some internal rules to get the Razr to market. The biggest: Much of the critical work on the phone was done at a downtown Chicago innovation lab known as Moto City — rather than solely in the company’s sprawling traditional research and development facility in suburban Libertyville, Ill. Decorated in a trendy palette of oranges and grays, Moto City fills the 26th floor of a high-rise once occupied by a dot-com.
To hustle the phone into production, Motorola engineers left their cubicles in Libertyville to team up with designers and marketers 50 miles to the southeast in Moto City. With its open spaces and waist-high cubicles for even senior managers, the lab fostered teamwork and a breaking down of barriers — both of which contributed to the success of the project. Razr developers, for instance, bypassed a normal process of running new-product ideas past regional managers across the world. Because they wanted to lead the market, not just give managers and customers what they thought they wanted, the Razr team put aside normal practices. “We did not want to be distracted by the normal inputs we get,” says Gary R. Weiss, senior director of mechanical engineering. “It would not have allowed us to be as innovative.”
Innovation labs are a key part of a movement to overhaul old-style R&D. They are designed to complement, and sometimes even replace, the intensive traditional system — which required that scientists or engineers toil away privately for years in the pursuit of patents, then hand their work over to product developers, who in turn dropped it onto designers’ and marketers’ laps for eventual shipment out to the public. The leisurely old handoff approach worked fine a few decades ago, when the likes of Bell Labs and RCA Laboratories could take years to develop transistors and color TVs, knowing they would enjoy protected markets for years more. But today’s rapacious competition means innovations grow stale fast. Companies must churn out updates far more quickly. Already, Motorola has unleashed follow-on phones, such as the candy-bar style Slvr and the rounded, pert-looking Pebl, along with a bevy of novel colors, such as hot pink, for the flip-top Razr.

Since Lockheed’s Skunk Works started in the 1940’s, I find it amusing to see the concept now touted as a radical break from past decades. In any truly innovative company, the old over-the-transom method of product development (scientist to product development engineer to designer to marketing) went the way of the dinosaur many years ago. (In fairness to the author, the piece does discuss other companies who use the innovation lab model and the difficulties these labs face.)
But, as the article illustrates, this old version of the innovation process remains fixed in our minds. No where is that more evident that in Washington. Our entire so-called innovation policy is built upon that pipeline model. Our debates are over how to create more inputs to that pipeline: increasing the number of scientist and engineers; improving math and science test scores; and, expanding funding for science.
What about the other parts of the system — the designers, the product developers, the marketers? Not only are they completely left out of the process by this policy myopia, their contributions are downplayed (such as in the statements that the study of arts and crafts is useless to production and should be replaced by more science). Wrong! We need those folks who studied glass-blowing as well as those who studied differential equations. They all bring important skills to the process.
And what about the system as well? With policy focused on pushing more input into a pipeline that doesn’t even work that way anymore, we are completely neglecting how the system really works. We need a policy that focuses on how the system works and how to improve the interaction among the various parts. There is a big push for funding of science and engineering students. How about support for students at the new Stanford Institute of Design? Or how about a program similar to the old Engineering Research Centers (ERCs) to replicate the Stanford model (and other variations)?
As long as our vision of innovation remains stuck in the industrial era model of the pipeline, we will continue, every few years, to re-invent to wheel — of in this case, to re-discover the skunkworks.

Protecting your intangibles: Feta is Greek

Today, Tony Blair is seeking to re-start the re-start of Europe’s competitiveness and budget framework at an informal summit at Hampton Court (Henry the VIII’s old hang out). The talks will cover a number of topics, including the EU’s internal battle over trade. While these fights are likely to continue, the EU Court has moved ahead with strengthening one form of intangible — geographic indicators. The specific case: EU Court Gives Greece Full Rights to Feta Label

When the European Commission gave feta its protected designation of origin in 2002, it argued that natural, geographic and human factors had combined to give the cheese its specific Greek character. It said the extensive grazing of special ewes and goats on Greek terrain gave the cheese its specific aroma and flavor.
“The interplay between the natural factors and the specific human factors, in particular the traditional production method, which requires straining without pressure, has thus given feta cheese its remarkable international reputation,” the court said.
German and Danish producers also have taken the lead in campaigns to have feta declared a generic product in recognition of the fact that production has spread well beyond the cheese’s origin, and took the case to the EU’s highest court. The court ruled that wasn’t enough to claim the name, arguing several Balkan countries produced such a briny cheese for a long time, but all called it something different.

The EU’s system of protecting traditional local products covers hundreds of drinks and foodstuffs — including Denmark’s Danablu blue cheese, Welsh lamb or Germany’s Dortmunder beer.

The interplay of natural, geographic and human factors — an interesting description of what others might call “Jurisdictional Advantage”! (See MaryAnn Feldman’s discussion of that issue on the Athena Alliance website.)

Bernanke and the I-Cubed Economy

Yesterday I posted Stephen Roach’s comment that Ben Bernanke’s credentials as an inflation-fighter might not be the most importance aspect of the job Bernanke is about to take over. (Roach is more worried about a dollar crisis). In today’s Wall Street Journal, David Wessel notes that the role of the Fed Chairman has evolved, especially under Greenspan, to include broader economic advice beyond monetary policy.

Mr. Bernanke knows his first mission is to build credibility as the chief helmsman of the U.S. economy. He’ll avoid giving Greenspan-like advice on taxes and spending for a time, and may never be as influential on so many issues as Mr. Greenspan is. But, in a political system often unable to look beyond the next election, Fed chairmen see themselves as anchors of common sense. Mr. Bernanke is likely to be no exception.

Common sense, however, requires a deep understanding of the economy. Alan Greenspan understood the changing nature of the economy – the movement as he called it to a “weightless” economy. Bernanke kind-of understands, but is a way that makes me wonder. In a speech earlier this year (while he was still with the Fed), he talked about productivity and the role of intangibles. Rather than note how the structure of the US economy was changing (as has Greenspan), he discussed how information and communications technology (ICT) has led to an increase in productivity. This seems to be an extension or variation of the standard “capital-deepening” explanation — better tools. To his credit, he does understand that the productivity gains are coming from the ICT-using sectors as well as the ICT-producing sectors (what we normally think of as “high-tech”).
When it comes to the role of intangibles, Bernanke discusses how intangibles are necessary to utilize ICT:

Some observers have characterized the new information and communications technologies as general-purpose technologies (GPTs), which means that–like earlier GPTs such as electrification and the internal combustion engine–they have the potential to revolutionize production and consumption processes in a wide variety of contexts (Bresnahan and Trajtenberg, 1995). To make effective use of a GPT within a specific firm or industry, however, managers must supplement their purchases of new equipment with investments in research and development, worker training, and organizational redesign–all examples of what economists call intangible capital. For example, to realize the benefits of its ICT investments, Walmart had to reorganize work assignments, retrain workers, develop new relationships with suppliers, and modify its management systems. Although investments in intangible capital are (for the most part) not counted as capital investment in the national income and product accounts, they appear to be quantitatively important. One recent study estimated that, by the late 1990s, investments in intangible capital by U.S. businesses were as large as investment in traditional, tangible capital (Corrado, Hulten, and Sichel, 2004).
Recognizing the importance of intangible capital has several interesting implications. First, because investment in intangible capital is typically treated as a current expense rather than as an investment, aggregate saving and investment may be significantly understated in the U.S. official statistics. Second, firms’ need to invest in intangible capital–and thus to divert resources from the production of market goods or services–helps to explain why measured output and productivity may decline initially when firms introduce new technologies. Finally, the importance of intangible investment explains to some degree why the lags between ICT investment and the resulting productivity gains can be long and variable. Because investments in high-tech capital typically require complementary investments in intangible capital for productivity gains to be realized, the benefits of high-tech investment may become visible only after a period of time.

In this discussion, Bernanke does not seem to acknowledge the role of intangibles as a driver of both innovation and productivity, unrelated to the utilization of ICT. In fact, there is one phrase from the above quote that specifically worries me: “firms’ need to invest in intangible capital–and thus to divert resources from the production of market goods or services.” This places intangibles in a secondary position, something one derivation way from actual production, rather than at the core. Investment in intangibles is like any other investment in productive capacity. Would that phrase make as much sense if it read “firms’ need to invest in machinery–and thus to divert resources from the production of market goods or services?” Only if he is referring to investment as diverting resources from current operations. But I don’t think that was what he meant.
Granted, the entire phrase acknowledges an important point: that output and productivity often initially declines with the introduction of new technology because of the learning process and the changes to the production process that may be needed to maximize the utilization of the technology (which should rightfully be considered intangibles). He also recognizes that “general purpose technologies” such as electricity change the production process. Later on he makes reference to this as well: “And if rapidly improving information and communication technologies are truly general-purpose technologies, history suggests that they will continue to stimulate new ways of producing and of organizing production.”
But, he really doesn’t follow up on that point. He did not discuss was how the nature of work itself is changing. That is the key point which Alan Greenspan understands — not just new ways of producing and organizing production of the same old products but radically new products services and production processes. If Bernanke is to play the role of the chief economic helmsman, he will need to deepen his grasp of what that economy looks like. He is close — but maybe not yet all the way there.
I realize that this is an exercise in old fashion Fed-gazing (trying to discern what might happen from a few select statements). It is grossly unfair to characterize Dr. Bernanke’s views on the basis of one speech. I’m sure we will learn more about how he sees the economy as the nomination progress.
Or, then again, we may not. This is the Fed after all, and far more powerful market players than me are dissecting his every word and action. He may learn very quickly to be extremely careful in what he says.
For all of us, it will be his actions, not so much his words, which will show whether he truly understands our economy. For all our sakes, I wish him well.

Fighting the wrong battle at the Fed?

The reaction to the nomination of Ben Bernanke to head the Fed has generally been positive. Not being a monetarist, I’ll decline to comment on his inflation-fighting qualifications — other than to note that by law the fighting inflation is only part of the Fed’s job. There are two prime goals for monetary policy: promoting full employment and promoting stable prices. The Fed is also the guardian of the stability of the banking and monetary system.
Which leads me to Stephen Roach’s comments in the LA Times, “The ambush waiting for Bernanke”:

Bernanke is widely thought to be the perfect central banker to cope with this problem. He is renowned for his skills as an inflation fighter. He has led the charge in the academic debate over “inflation targeting” — arguing that a central bank needs to be explicit in aligning its policy instrument (the federal funds rate) with a numerical target of price stability (a 1% to 2% increase in the “core” consumer price index).
But I suspect that the current inflation scare will turn out to be a false alarm. As always, energy prices will come down when demand sags — some of that may already be occurring — and the new and powerful forces of globalization should continue to hold other prices largely in check.
The U.S. economy actually faces far greater threats than inflation — threats that an inflation targeter such as Bernanke may be ill-equipped to deal with.
At the top of the list is a record U.S. current account deficit — the broadest measure of the nation’s trade balance (imbalance, in this case) with the rest of the world. Running at an annual rate of close to $800 billion in the first half of 2005, it requires foreign funding to the tune of $3 billion per business day. To accomplish that without a sharp drop in the dollar and/or a related backup in interest rates requires extraordinary confidence on the part of foreign investors in U.S. assets.
The foreign confidence factor could well be Bernanke’s biggest challenge when he takes the reins at the Fed. The nation’s current account deficit averaged just -1.5% of gross domestic product at the three most recent Fed transition points — the ascendancy of Miller, Volcker and Greenspan.
By contrast, today’s deficit is more than four times larger at -6.4%. Moreover, in the face of an energy shock and a post-Katrina fiscal spending binge, there is good reason to look for a further reduction in U.S. saving and a related widening of the current account deficit over the next year.
In short, the U.S. is going to be asking a lot more of the foreign investor at precisely the moment the Fed is transitioning from Greenspan to Bernanke. As the maestro leaves the building, the hard-won aura of foreign confidence that surrounds him could be quick to follow. Bernanke could be faced with a dollar crisis and the related need on the part of foreign investors to seek compensation for taking currency risk. That compensation invariably spells higher interest rates — the last thing the nation’s housing bubble and overly indebted consumers need.

I’m not sure I agree that higher interest rates are necessarily bad. But I do agree that the Feds decisions are likely to revolve around reactions to what foreign investors do. Our huge current account deficit makes that an inevitability.
Welcome to what might be the toughest job in Washington, Dr. Bernanke!

A model for the I-Cubed Company

When one thinks of possible models for a company in the I-Cubed (information, innovation, intangibles) Economy, the inclination is to look at the high-tech or the “creative” sectors of the economy: electronics, software, advertising, etc. How about industrial components – specifically Illinois Tool Works? ITW is a company that is “a hodgepodge of mundane products, from automotive components and industrial fasteners to zip-strip closures for plastic bags and laminates for flooring and countertops.” That is how Business Week describes it in their profile of the company No Need For Economies Of Scale. It is also a company where “its research and development outlays come to just 1% of sales, a miserly budget for even a bulk-commodities producer.”
But, as Business Week points out, “ITW routinely finishes among the Top 100 patent recipients in the U.S. every year, ranking 66th last year, with 301 new awards and 468 applications.”
The secret? Entrepreneurship and attention to customization.

ITW owes its outsize achievements to its unorthodox business model. Like many old-line outfits, the company gets most of its growth from acquisitions; it has averaged 28 deals a year over the past decade. But management does not then merge the new units with old ones to reduce payroll and other expenses. Instead, it retains them as freestanding entities to maintain their entrepreneurial drive and keep them close to their customers. Today the $11.7 billion conglomerate operates through 665 separate businesses, each with its own profit and loss statement.
The company also practices something it calls an 80-20 philosophy. The term derives from the fact that 80% of sales and profits often come from just 20% of customers. Once this top tier has been identified, management then lavishes attention on it — including custom-designed products — to maximize the return from ITW’s personnel and assets.

As the CEO, David Speer, explains:

Our business model is the antithesis of scale. To begin with, our organizations tend to be small and lean. If I were to look at combining several units, the real cost savings we would wring out would be relatively modest. Smaller, more tightly focused units also have a greater entrepreneurial spirit; there’s greater participation by the employees in the business. That leads to greater intimacy with the customer and better understanding of new opportunities.

The antithesis of scale — what a great way of putting it.
However, Speer is not completely correct when he says that. ITW does get traditional economies of scale in its concentrated production that comes out of the 80-20 philosophy.

We take the 80-20 approach and dedicate production lines and resources to high-volume products. A line will run only those three or four products, if that’s the case, which represent the 80% of that business. We’re able to make fewer changeovers on these lines and can increase the life of the tooling. Runs that are much longer are more efficient. By physically linking machines, we’re often able to eliminate work in process and storage areas, which means a smaller footprint. And, of course, all the material handling and indirect costs are reduced. That doesn’t mean we don’t pay attention to the other 20% — we just manage them separately.

Customized production married to dedicated production. An interesting model for manufacturing in the I-Cubed Economy.
But, before you start touting this model as the savior of American manufacturing, with 21 businesses in China Speer is clear about the need to be in overseas markets.

We operate with the basic philosophy that we want to produce where we sell. If I’m going to sell a product in China, I want to produce it in China. If I want to produce locally, then I have to be able to compete locally and make a decent return.

It may not be the model of the globally competitive company that we normally think of. But ITW’s attention to local markets may be the way that American manufacturing can hold on to a portion of the ever-changing world market.

Just the beginning of the connected world

It seems like every day we are bombarded with news about the latest in connecting our world (can’t say “wiring our world” any more since some of it is wireless). Blackberries and Palms will soon talk to one another. WiMax is replacing WiFi, making “hot spots” an anachronism. (What will all those coffee shops do?) Broadband will be available everywhere over power lines.
From all appearances, the always-connected world is rapidly approaching.
This constant connectivity is having its impact, as CNN reports in Wireless technology changing work and play

The eroding distinction between work and play is one of the many paradoxes at the heart of our increasingly wireless world.

That is an issue that human beings have always faced – expect for the brief period of the factory-age. The 9 to 5 job somewhere distant from the home is a recent phenomenon. Before, people always balanced work and play – because both work and play were ever present in their daily lives, not something that one did in one place and something one did over someplace else.
In the connected world, we are simply returning to the older pattern.
And the solution to the eroding distinction? It is called an “off” switch.

Students don’t pay attention in class — duh!

Sometimes technology will change people’s behavior in major ways. Other times the technology will be adapted to basic behavior (but may result in subtle changes). In the latter category is the use of computer laptops in the classroom, as related in this Wall Street Journal story: The Laptop Backlash:

Dennis Adams, a computer-systems professor at the University of Houston, was thrilled a few years ago when his school began providing laptop computers to incoming students and set up wireless Internet access in classrooms. But in the past year, his enthusiasm has turned to dismay.
A recent visit to his class — where about half the 26 students are using laptops — explains why. While Prof. Adams lectures, five students use an online chat room to post comments on his lecture, on classroom stragglers, and on the meaning of his discussion questions. Another student spends nearly two-thirds of the three-hour class playing computer chess, instant messaging and viewing photos of a fraternity party posted on the Web. Meanwhile, 23-year-old Mike Fielden buys a pair of sneakers on eBay.

The story goes on to talk about how wide spread the problem is – and how universities faced a similar problem earlier.

The unintended consequences of wiring up classrooms echo an earlier rash of problems after colleges provided high-speed Internet access to dorm rooms. The hope then was that students would use the Internet for research and homework. Instead, many students wasted lots of time sending instant messages and illegally exchanging music files.

Guess what — college students don’t always pay attention in class. And they think that listening to tunes is cooler than doing homework. Why should this surprise anyone? After all, I’m sure many of us sat through enough boring lectures to understand this phenomena (and may have, as in my case, give a few boring lectures as well). And how many of you even today sit in a boring conference checking your emails and surfing the web at your laptop while the speaker drones on.
The answer isn’t to ban the technology – which some universities have tried.

But it isn’t that easy. When UCLA’s Anderson School of Management installed wireless-blocking technology in its classrooms two years ago, the effort disrupted network use in offices and halls as well. Last June, a faculty committee concluded that stopping the signals amounted to a technology arms race that couldn’t be won and yanked out the blockers. After all, the panel reasoned, merely blocking wireless computer networks wouldn’t stop cellphones with Internet access.

The answer — and here is where the subtle change in behavior comes in — is better presentations.

Some professors have responded to the prevalence of networked computers in class by changing their teaching styles. The University of Houston’s Prof. Adams, for instance, now peppers his lectures with enough questions to reduce students’ Web surfing. When he is discussing a particularly complex subject, he says, he tells students to close their laptops.

If laptops in the class room have the ultimate effect of forcing professors to teach better, then I would say the digital revolution has really paid off.