New trends in innovation

The Business Week review of The Year in Innovation has more than the normal look back. It highlights three trends in innovation that are taking root: trickle-up innovation, design thinking and open innovation.

Trickle-up innovation may best represent what some are calling today’s “good enough” marketplace. Multinationals used to develop their top-of-the-line products for the developed world. These goods then “trickled down” to emerging markets as even better replacements were introduced to affluent consumers. Now the process is being flipped. Companies increasingly are designing low-priced, no-frills products for those at the bottom of the pyramid and trickling them up to the developed world.
. . .
Design thinking has been around for some years now, but it became a mantra among consultants in 2009. The notion boils down to this: Executives at all levels would be more innovative and therefore successful if they approached problems the way designers do. That means understanding a problem or need from the consumer’s point of view and then coming up with the best good or service for the job. P&G, again, is often held up as a corporate role model here thanks, to such products as its dust cloth Swiffer, which opened up a whole new market for the consumer goods giant.
. . .
Open innovation spread far and wide as companies sought to offset cuts in their own R&D budgets by soliciting help from outsiders, including customers, suppliers, and freelance experts. While companies such as Johnson & Johnson (JNJ) have used the Internet to vacuum up worthwhile ideas and practical assistance since the previous downturn almost a decade ago, the Great Recession is converting more to open innovation today. Clorox (CLX), for example, says 80% of its new products included input from at least one partner.

These are three ideas that could be game changers in our thinking about innovation. Now all we need to do is figure out the public policy to support these activities.

Intangible Assets workshop report now available

Last year, Athena Alliance helped organize a conference on Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth. This one day conference was hosted by the National Academies’ Board on Science, Technology and Economic Policy (STEP), in cooperation with the Committee on National Statistic and sponsored by the Commerce Department’s Bureau of Economic Analysis. It focused on discussions of what are intangibles and how they work, how intangible investments compare and contribute to growth, how intangibles are created and used by firms, and what the government’s role should be in supporting markets and promoting investment in intangibles. The conference included remarks from Senator Jeff Bingaman (D-NM) and then Under Secretary of Commerce for Economic Affairs Cynthia Glassman. Presentations came from a number of experts in the field, included Charles Hulten, Carol Corrado, Baruch Lev, James Malackowski, Jonathan Haskel, Steven Landefeld, Ahmed Bounfour, Douglas Lippoldt, Nir Kossovsky, and myself.

The report of the conference is now available — Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth: Summary of a Workshop. The report does a good job of capturing this interesting and stimulating discussion. The presentations are also available the STEP Board’s website.

Manufacturing Framework

Last week, the White House released its manufacturing framework and held a meeting of the Middle Class Task Force focused on manufacturing (watch video). The document makes the cases for government policy in manufacturing and describes the actions that the Administration is taking, grouped into seven baskets:

Provide workers with the opportunity to obtain the skills necessary to be highly
Invest in the creation of new technologies and business practices.
Develop stable and efficient capital markets for business investment.
Help communities and workers transition to a better future.
Invest in an advanced transportation infrastructure.
Ensure market access and a level playing field.
Improve the general business climate, especially for manufacturing.

There is much I agree with in the framework. The specific recommendations of the framework are all things I support. For example, the plan to double the Manufacturing Extension Partnership budget is something I have advocated (see previous postings). But, as I have also advocated in those previous postings, there is more that can be done.

The framework outlines a number of challenges facing manufacturing. The discussion of the opportunities, however, envisions toward moving manufacturing into specific new products: biotechnology, wind power, nanotechnology, aerospace, next generation automobiles. Only in the one paragraph on the steel industry is there a discussion of the changes to the manufacturing process. As I have argued earlier, we need a strategy that transforms manufacturing, not preserves the status quo. First, we need to adopt a “high road” strategy that puts its emphasis on all upgrading of the inputs to the production process: technology, worker skills and cooperative/collaborative organizational structures. The framework implicitly accepts the “high road” strategy–especially in its discussion of worker skills. I would like to see the Obama Administration adopt it explicitly and use it as a guidepost for its actions. Second, we need to understand that the line between manufacturing and services has blurred. That means a shift from turning out a large volume of a commoditized product to customization and innovation. But the entire system (and supply chain) is still designed for the industrial age.

The framework does recognize that the nature of the economy has changed. As the document clearly states, “Intellectual capital, such as patents from research and development as well as managerial know-how, is a vital component in determining costs, growth rates and the creation of new industries.” This recognition of the importance of intellectual capital is a very welcome addition. Unfortunately, discussion in the framework limits itself to R&D and intellectual property–although the section on worker skills is part of a larger intellectual capital structure. A successful manufacturing framework must embrace the full range of intellectual assets and intangible, including organizational structure, worker skills and tacit knowledge, and relationships with customers and suppliers (also all part of a “high road” strategy).

While I don’t (yet) have a lengthy set of additional recommendation that could be included in a manufacturing strategy, let me just refer the reader to earlier postings on innovation strategy, including our paper from a year ago, Crafting an Obama Innovation Strategy. But look for more to come (I hope) in the new year.

The Protocol Society?

In his New York Times column today, David Brooks reviews a new book where he calls this the Protocol Society:

In the 19th and 20th centuries we made stuff: corn and steel and trucks. Now, we make protocols: sets of instructions. A software program is a protocol for organizing information. A new drug is a protocol for organizing chemicals. Wal-Mart produces protocols for moving and marketing consumer goods. Even when you are buying a car, you are mostly paying for the knowledge embedded in its design, not the metal and glass.

As he notes, “Protocols are intangible, so the traits needed to invent and absorb them are intangible, too.”

This is a good description — but I thought we already called this the knowledge economy.

Creation and destruction

This is the time of the “Year in Review” articles. This year it is the “Decade in Review” as we move into the “teens”. This one, at the Wall Street Journal, caught my eye — Creativity, Meet Destruction:

To understand the challenges that faced businesses the past 10 years, consider the household names that didn’t make it through the decade: Anheuser-Busch, Compaq, Gillette, Enron, Lehman Brothers, Merrill Lynch, WorldCom.
. . .
“This is what [Austrian economist Joseph] Schumpeter had in mind with his term ‘creative destruction,'” says Paul David, an economic historian at Stanford University. Industrial collapse is a “messy, messy process,” Mr. David says. “It’s a great drama, and watching it play out in this decade has been very interesting.”

Much has been said about Schumpeter’s phrase “creative destruction.” The phrase is a way to capture the dynamic action of the economy where the new replaces the old. The Journal pieces cites the internet as a classic example of a new technology creating a new business model that replaces the old way of doing things. We also call this “innovation.”

Too often, however, “creative destruction” it has been used to justify non-creative processes. The argument here is that we have to allow economic forces to crush certain activities in order for new activity to flourish. Thus, under this view, high unemployment and high bankruptcy rates are good because it frees up resources.

This view has the process backwards. Destruction does not necessarily cause creation. Creative activities – innovation – draw resources from the old to the new. Yes, you may have to tear down the old house to build the new. But tearing down the old house doesn’t necessarily mean the bricks will magically reform themselves into a new building. Nor will economic forces immediately flow into the vacuum: the vacant lot may side empty for decades.

And remember that not all destruction is part of “creative destruction” process. Take for example the companies listed in the beginning of the Journal article. Anheuser-Busch was part of a corporate take-over. No “creation” there – and the “destruction” will probably be “corporate rationalization.” Lehman Brothers and Merrill Lynch didn’t fall to a new business model or economic change. Nor was Enron’s fall due to some one taking their business away because of a better way of doing things. And last I checked, Gillette razor’s were still available – even if the company is not an independent entity.

So, let’s not confuse corporate restructuring with innovation. When someone explains why the closing of a company or a takeover of one firm by another that simply reduces competition is all part of the great goal of “creative destruction”, ask them where the creative part is.

And let’s focus our public policy on the innovation side of the equation. We need to ensure that access to resources doesn’t become a barrier to innovation and the creative part of the process. But that doesn’t mean destruction for destruction’s sake.

[Note: in fairness to the author of the Journal article, the piece really is about the changes in the decade. It is just that the opening examples don’t fit the rest of the story.]

Patent Exchange

Here is an interesting story on OceanTomo’s Intellectual Property Exchange International from the DowJones Newswire — First Patent Exchange To Launch Early Next Year. The purpose of the exchange is to give patent owners a mechanism to sell their royalty rights – thereby creating more liquidity and more price transparency in the IP market. But, as the story points out, there is some concern that the exchange will lead to greater litigation via as “patent trolls” buy up licensing right:

“Whenever anybody aggregates patents, there’s always that suspicion,” said Patrick Thomas, principal at 1790 Capital, a hedge fund that invests in companies based on their intellectual property. But Thomas said Ocean Tomo’s current business based on valuing companies’ patent assets lends credence to the new venture.

I am less worried about the troll aspect of this — trolls will do what trolls do. I am interested to see how it works for providing price setting. As the story notes, “Traditionally, companies hoping to license out patents do so in secret, labor- intensive and expensive deals that can be hard to value properly.”

In some ways this is a derivative market — in that it is buying and selling licensing rights rather than trading the patent (which is what ICP OceanTomo’s patent auctions does). While monetization of IP is a useful activity (and something which Athena Alliance has looked at extensively), it is the actual right to use the patent which most companies care about — not just the renting out their licensing rights. So I am not sure there is enough trading to create the liquidity needed to adequately set prices. Derivative markets, such as this patent exchange, can help set the market price – but can also be way out of line if they are illiquid and/or captured by speculators. A friend of mine tells the funny story of when he, as a journalist covering a certain market, ended up being the “market price setter” when the exchange prices were considered wacky – so much so that apparently companies were concerned when he took a trip for fear of losing him in a plane crash.

So, the exchange is a good step forward. But we should treat it as a pilot – and look carefully as to what else may be needed to both help it operate effectively and to provide the price setting and liquidity the market needs. Most importantly, we need to view this through the lens of our ultimate goal: innovation. For my part, I’m not interested in spurring monetization of intangibles for the sake of creating more trading. I am looking at this as a mechanism of funding – and fostering -innovation. If it doesn’t do that, then it is not worth it.

More funds for green manufacturing

According to a story in today’s Wall Street Journal, the Obama Administration is greatly increasing funds for the green manufacturing:

The expansion would increase three-fold the $2.3 billion available in the Section 48C Advanced Energy Manufacturing Tax Credit program, part of the $787 billion stimulus package enacted in February. That program has been over-subscribed. The additional money could go to applicants turned down when the money ran out.

This is good news — the “48C” program is one I have strongly supported (and have been told by Administration officials that it were far more good applications than funds).

It is also a program that can be made even more powerful. As I’ve argued before, the program should be modified from a current tax credit for clean energy technology manufacturing facilities to be an up front payment in lieu so that companies who are trying to build facilities like wind turbine manufacturing facilities can get the start-up cash they need. Such a payment in lieu of tax credits was already created for alternative energy production facilities in Section 1603 of the America Recovery and Reinvestment Act — and can serve as a model for the change.

This will need legislation — I do not believe it can be done through regulations. But there is a tax extenders bill working its way through Congress and there is likely to be a “jobs bill” next year. So, Congress will have an opportunity to take this successful program and make it even more successful. And put us on the path to truly using green technology to spur a renaissance in American manufacturing.

Innovation and Health Care

David Leonhardt has an interesting column in the New York Times — If Health Care Reform Fails, America’s Innovation Gap Will Grow — where he makes that case that our current system is bad for the future of the I-Cubed Economy:

Economic research suggests that more than 1.5 million workers who would otherwise have switched jobs fail to do so every year because of fears about health insurance. Some of them would have moved to companies where they could have contributed more, and others would have started their own businesses.

As he points out, as part of an innovation policy, “you would want to make people feel confident that they could take risks — start a new company or join a young one — without worrying about whether they would still receive adequate medical care.”

Our existing health care system is already a drag on our economic competitiveness by imposing costs on US businesses that their competitors don’t have to face. Leonhardt’s point about the negative impact of the health care system’s “job lock-in” affect is even more telling.