Fusion of services and manufacturing as "enduring strategy"

I was reading Strategy+Business’s Best Business Books 2011: Strategy (registration required) when I came across this as part of a review:

Services, not just products (or platforms), the second principle, stresses the importance of offering services as an effective way to avoid the commoditization of products. Not only do services add revenue, often at a higher profit margin, but they are also harder to replace.

It is one of the “six enduring principle” of Staying Power: Six Enduring Principles for Managing Strategy and Innovation in an Uncertain World by MIT Professor Michael Cusumano. Cusumano notes in a lecture on the book:

The second principle is that for many industries managers need to think in terms of services that complement their products and not just focus on the products or platforms themselves. Probably the best example of this is Apple. Apple continues to make great products, but the ipod, ipad and iphone are of little value without a very important service, the itunes digital media service. They are also not very valuable without an internet service. We can also take automobiles as an example of this as well. Most manufacturers over the last 15 years or so have made most of their money, not from the product, but actually from the services; financial services, such as loans and leases, warranties, insurance and after sale repair. General Motors has even rolled out telematic services in the form of the OnStar service. These are far more valuable than the actual products. The products become, in some way, a platform for delivering services. Once again, smart phones are pretty worthless without services. Another company that is very famous for ‘servitising’ their product and that is Rolls Royce. Rather than selling engines, they actually sell ‘power by the hour’, which is a different method of pricing and delivering the product. Many software companies have done this as well, for example ‘cloud computing’.

How times have changed! 30 years ago, the fusion of manufacturing and services would not be an “enduring strategy.” In fact, theory would be seen as polar opposite strategies: either you are a service company or you are a manufacturing company. Now we recognize the both/and transformation of the economy. Progress!

Homage or theft?

Apparently, Beyonce is getting all sorts of grief over her newest music video where she is accused of appropriating the dance moves of Belgian choreographer Anne Teresa de Keersmaeker’s work in the 1990s (who complained that Beyonce should have at least tried to hide the similarities). But as an article in the Washington Post (Beyonce: “Countdown” video and the art of stealing) points out, appropriation is a long standing fact in the dance and music world. The article points to a rich tradition of artist borrowing each other’s work – sometimes as homage, some time as straight forward imitation. The article goes on to partially defend the practice:

To be clear: I’m arguing for creative borrowing on epistemological and esthetic grounds, not legal ones. Copyright law is a whole different matter, and some recording artists have been sued for lifting too much. (Singer Rihanna settled a lawsuit last month brought by a photographer who claimed she copied his images in her “S&M” video.) Strictly from the point of view of enlarging awareness and fostering creativity, there are positives in dance appropriation. Beyonce’s dancing has brought great attention to the name and work of an important choreographer little known outside the field of modern dance. Do we really believe de Keersmaeker would prefer that her moves be, to use her term, hidden?
. . .
The fact is, in our world of knowledge sharing, it is no easy thing to claim originality and hold on to it. Perhaps it’s time to let go. Some of the greatest creative minds freely admit to a roving appetite.
“We have always been shameless about stealing great ideas,” said Apple founder Steve Jobs in a 1994 interview, speaking about his company’s creation.
With so much of the world’s artistic output being tossed into the communal cook pot known as the Internet, the act of helping oneself to the bounty will only increase. You could look at it as stealing, or as Duchamp did: “new thought.”
Or you can see it as Beyonce did: a golden opportunity to mash up something new.

This raises a number of issues — including giving credit when using another’s work. Sometimes it seems that the issue of appropriation is as old as the creative arts themselves. I wonder if the first person to do cave drawings complained that others were stealing his/her technique. But thief of intellectual property is a serious economic problem. The trick is finding the balance. As I noted in previous postings, there are some areas where sharing is allowed but controlled (such as the taboo of letting non-magicians in on the trick). There are others, such as comedy, where the use of others’ material is ok within limits. And there are still others where it is argued that the industry advances by copying, such as fashion.
As I’ve said before, these examples of what has come to be called “IP negative space” point out that there is no one-size-fits-all solution to the innovation and protection of ideas question. What works in one area may not work in another. What is deadly in one area may be absolutely critical in another. We need an innovation policy that can tell the difference.

Elderly as an asset

Normally, we hear stories about the coming demographic crisis of the greying of the population. The implication is that the elderly are a drain on resources and productivity. But here is a story in the Wall Street Journal about a possible change in approach by Maine (State’s New Trick: Old Dogs):

State officials say they are a real asset. They volunteer, help pay for schools without using them and create demand for everything from medical services to home repair.

And they contribute to the work force. Part of that is free labor in the form of volunteers. But the story also has examples of older entrepreneurs.
Now, there is a long history of luring retirees as an economic development strategy — mostly in the south and west. But for the most part, they expect the retirees to just spend money. So it is good to see someone at least beginning to take the view that the elderly can be assets.

The next boom in intangible asset sales?

The mobile communications revolution has already touch off one scramble for intangible assets, i.e. patents for smart phone. Now the names of AT&T and T-Mobile may join Nortel and Motorola in the great intangibles boom.
As everyone probably knows by now, AT&T’s takeover of T-Mobile is in trouble. According to Steve Lohr of the New York Time, AT&T may be considering selling up to 40% of T-Mobile’s assets in order to get anti-trust approval for the deal. Some of those assets are tangible, i.e. equipment. But the most valuable are the spectrum rights. Without spectrum, the equipment is useless. And the second most valuable asset is likely to be the customer base.
Lohr notes that there are a number of ways that AT&T could sell off these assets as part of a merger. They could go to a rival mobile company (most likely not Verizon because of anti-trust concerns). Or they could attract the interest of other buyers: companies wishing to breaking to the U.S. market, cable companies, or even investment companies seeking to re-sell the spectrum either later on or in smaller pieces.
Given the size of the deals here, the money involved could easily dwarf the Nortel $4.5 billion patent sale. The 2006 FCC spectrum auction brought in $13.7 billion. The AT&T/T-Mobile deal is worth $39 billion; 40% of that is $15.6 billion. Of course, only a portion of that would be spectrum and it is unclear how much spectrum AT&T would be willing to sell to make the deal acceptable to regulators (as little as possible, one assumes). Nevertheless, the numbers are significant.
And, who knows, such a sale could trigger a new feeding frenzy. So stay tuned.
According to a story in the New York Time’s Dealbook column, “AT&T is knee-deep in talks with Leap Wireless, a second-tier but growing wireless player, to sell it a big piece of T-Mobile’s customer accounts and some of its wireless spectrum, according to people involved in the negotiations.”
We will see if a) they can pull it off, b) it will satisfy the regulators, and c) how much the intangibles are worth.

Learning policy from other countries

Ross DeVol from the Milken Institute has a piece in the Atlantic’s Secrets of Innovation special report on The 8 Best Innovation Ideas From Around the World. This are:
 • Singapore’s education and human capital policies
 • Canada’s high-skill immigration policies
 • Finland’s R&D policies
 • Switzerland’s tax policies
 • Israel and Germany’s small business growth policies
 • Great Britain’s technology transfer and commercialization policies
 • South Korea’s business support policies
And as DeVol points out, there are surely others we could come up with. Now, I have to say I might not agree that all the policies from other nation’s would be either appropriate or effective in the U.S. circumstance. Not is it clear that we could simple package this group of policies together in a coherent fashion. For example, I don’t know if the Swiss tax system could support the Finnish R&D spending policy or Singapore’s education system.
But are regular readers of this blog know, I consistently argue for looking at the innovation policies of others and adopting them as appropriate. In that regard, I completely agree with DeVol’s bottom line: “If the U.S. can reformulate a group of strategies similar to those on this list, it could catapult itself to renewed preeminence in global innovation.”
The problem, as he also points out, such an innovation strategy would require consensus visionary leadership. And regardless of what you think about our leaders’ vision or lack there of, it is clear there is no consensus on a direction. To the extent we remain divided we will also be rudderless.
I recognize that the U.S. has always had its internal differences over policy. A 60% win by a President is considered a landslide and a mandate (no President has gotten more that 61.1% of the popular vote). But we now have a political system that rewards blocking action rather action.
Maybe we can forge consensus around some of these items. One example might be the recent bipartisan bill by Senator Coons and Rubio — which includes a few of the elements listed above (see earlier posting). So, lets look at the list and see what we can accomplish – a step at a time.

And MNCs continue to invest in intangibles

Yesterday’s posting discussed the job creation patterns of US multinational companies (MNCs) as analyzed in the most recent The Commerce Department benchmarking study “Operations of U.S. Multinational Companies in the Unites States and Abroad“. That study also included data on R&D spending:

Another notable development in the operations of U.S. MNCs in 1999-2009 was the relatively rapid growth in research and development (R&D) expenditures. During that period, R&D expenditures grew at an average annual rate of 4.8 percent–nearly 2 percentage points faster than the 3.1 percent average growth in value added of U.S. MNCs and much faster than the 0.9 percent average growth in capital expenditures and the 0.6 percent average growth in employment. During periods of economic contraction and uncertainty, such as in much of 1999-2009, U.S. MNCs may continue to invest in R&D to remain competitive over the long run even when they are reluctant to hire workers or invest in tangible assets.

That doesn’t mean these companies don’t spend on capital equipment. According to the study, “The ratio of R&D expenditures to capital expenditures of U.S. MNCs was 0.4 — meaning that they spent $400 million dollars on R&D for every $1 billion spent on capital expenditures.”
R&D spending increased 7.1% between 1999 and 2009 by foreign affiliates of U.S. MNCs, compared to a 4.4% increase by the U.S. parent companies. The result was a gradual shift of R&D activities abroad. Not so much a movement of activities from the U.S. to other countries but an increase in activity abroad compared to the level of activity here. The biggest increase in R&D spending by foreign affiliates of U.S. MNCs was in India — with an annual growth rate of over 50% between 1999 and 2009. That was followed by a 19% growth rate in Eastern Europe and a 17% growth rate in China. Interestingly, both Africa and the Middle East also had growth rates of almost 17% and over 16% respectively, which I believe mostly reflects spending in South Africa and Israel respectively.
The study also breaks down spending by industry:

By industry, R&D expenditures by U.S. parents were concentrated in three industry sectors–manufacturing ($146.9 billion), information ($20.1 billion), and “professional, scientific, and technical services” ($15.8 billion); together, these sectors accounted for 93.7 percent of total R&D by U.S. parents in 2009 (table 8). Within manufacturing, chemicals, transportation equipment, and “computers and electronic products” accounted for 82.5 percent of the R&D expenditures. Information accounted for 10.3 percent of parent R&D and was concentrated in publishing industries, primarily software publishing. “Professional, scientific, and technical services” accounted for 8.1 percent of R&D by U.S. parents, primarily “computer systems design and related services.”
. . .
Between 1999 and 2009, the share of total parent R&D by U.S. parents in manufacturing fell 7.7 percentage points, while the combined share of R&D by U.S. parents in information and “professional, scientific, and technical services” rose 6.3 percentage points. Within manufacturing, the share of R&D by U.S. parents in computers and electronics products fell, but the share in chemicals rose. The share of parent R&D in information rose 5.0 percentage points, led by increases in publishing industries (including software publishing) and other information services.

As noted above, the study makes statements about the relative investments in tangible versus intangible assets. However, data is not collected on spending on intangible assets other than R&D. So we don’t really have a complete picture of investments in intangible assets from these surveys. That is a data problem that needs to be corrected.

MNCs as job creation machines — just not here

In earlier postings, I discussed the recent data on the slowdown in job creation by start-ups. It has been taken as an article of both faith and data that small companies, especially new start-ups are the job creators in this economy and the large companies are dinosaurs. But, as David Wessel points out in today’s Wall Street Journal, multinationals are adding employment but not in the U.S. (“U.S. Firms Keen to Add Foreign Jobs“):

U.S.-based multinational corporations added 1.5 million workers to their payrolls in Asia and the Pacific region during the 2000s, and 477,500 workers in Latin America, while cutting payrolls at home by 864,000, the Commerce Department reported.

The Commerce Department study (Operations of U.S. Multinational Companies in the Unites States and Abroad) was recently published in the November 2011 edition of the Survey of Current Business.
The study attributes the job growth patterns to companies expanding production locally in fast growing markets, rather than shifting to low-wage sites. However, there has been an interesting shift in U.S. trade patterns by multinationals, where “MNC-associated imports exceeded MNC-associated exports by 21.6 percent, a reversal from 1999 when MNC-associated exports exceeded MNC-associated imports by 12.9 percent.” In other words, multinationals switched from being net exports to being net importers. I take this as evidence of offshoring of production, not just expansion of production in foreign markets to satisfy the demand in those markets.
I would note also that this is a study of U.S. multinationals, not foreign multinationals operations in the United States. Employment by foreign companies in the U.S. is also down. But that is more the result of the general economic slowdown in the U.S. rather than any major shift in production locations. For the latest data on these companies, see the BEA’s report “U.S. Affiliates of Foreign Companies” in the August 2011 edition of the Survey of Current Business
So, in addition to policies for start-ups and helping existing companies grow faster, we need to look at ways to promote job growth in the US by the US multinational companies. There are no shortages of ideas floating around to do that — from tariffs to taxes. I don’t have an particular insights to any of these proposals. I do like the concept imbedded in the recent legislation by Senators Coons and Rubio to give a bonus (a Domestic Manufacturing Credit) in the R&D tax credit to companies who produce in the U.S. (see earlier posting). We need more thinking like that if we are to solve our jobs problem.

It's a minor thing . . .

One point I keep making in this blog is that the intangible economy involves a mind set change as much as anything else. Here is a very minor example. There are bills in the House and Senate strengthening anti-corruption laws: H.R. 2572 Clean Up Government Act of 2011 and S. 401 Public Corruption Prosecution Act. With respect to intangibles, both make one minor change to the mail and wire fraud statutes to include licenses and other intangible rights along with “money and property” as things that can not be obtained by fraudulent means. It is a very technical change. But it illustrates my point: public policy and the legal code are full of small items that never took intangibles into account when they were first enacted which need to be changed. More importantly, we need to stop thinking the way we did in the past and stop using to old boilerplate for making our laws and policies. Intangibles are important and public policy, large and small, needs to that that into account.

Patents are not innovation

One of the thing that drives me absolutely crazy is the narrow use of patent data as an indicator of innovation. Patents are important, but they are very misleading innovation indicator. Case in point is the new Thompson Reuters Top 100 Global Innovators — which is solely based on patents. Yes, they use various aspects of patents, not just the number of filings. But they still equate patents as the sole indicator of innovation. Wrong, wrong, wrong.
They can’t even use other criteria (such as every other study of innovation uses, like the percent of products that were introduced in the last 5 years).
As a result they end up with the predictable finding that the IT companies are the most innovative. And they end up with the ridiculous finding that pharmaceuticals are as bad at innovation as the petroleum industry. Why? Because different industries use intellectual property in different ways.
Analysis of patents tells us one thing — about patents. It says little about innovation. And studies that use only patents as indicators of innovation do us all a great disservice

Recognizing individual skills

We all know that human capital is much more than formal education, even though most of the time we use levels of educational attainment as a proxy for human capital. We do this because years of formal schooling and educational certification (degrees awarded) can be easily measured and verified. But many of the skills needed in the I-Cubed Economy come through the process of life-long learning — especially since the skills we need in our jobs today are not necessarily likely to have taught when we were back in school. Only through livelong learning can we keep up and continue to build our individual and group human capital.
But how to recognize that learning? Here is an interesting idea: Badges for Lifelong Learning. Sponsored by the MacArthur Foundation and supported by Mozilla, the project will create a series of digital badges that will validate the acquisition of knowledge or skills. The badges would be available on a person’s website, Facebook page, etc and allow an employer to access detailed information about the individuals skills. The badge becomes a certification of skills learned both inside and outside of the formal educational degree and certification process. In essence, the badges help an individual build their brand and reputation through the compilation of their skill set.
The project is just beginning, with Stage One underway. According to the website:

The goal of Stage One is to identify compelling learning content, activities, or programs for which a badge or set of badges would be useful for recognizing and making visible learning that takes place in a particular area or topic. Badges may represent learning a set of skills, acquisition of competencies, achievements, interests, or affiliations. They can provide visible milestones on a learning pathway, support various types of community participation, signal achievement to a community of interest and outside stakeholders, support participation and further learning, and build identity and reputation.

The project is more than just the creation of these badges. It is also a way to promote livelong learning and drive new thinking as to how learning happens.
Let me throw in a different twist to the subject. Maybe these might also become a way of measuring human capital? The project supports are probably not thinking about this dimension of the issue. But if this takes off, looking at these badges might be a good compliment to looking at traditional educational measures (e.g. the number of BS degrees in engineering). Something to think about.
See the video of the launch event (1:55 minutes) below: