Talk on reinventing the research university

Interesting talk by Jim Duderstadt, former president of the University of Michigan, at the April meeting of the Coalition for Networked Information (CNI). [Disclaimer: UM is my Alma Mater – both undergraduate and graduate.] [And spoiler alert: it gets really interesting about half way through at minute 34 when he switches to the speculative longer term and larger view.]

Summarizing a complete innovation strategy

Earlier this year, OECD Secretary-General Angel Gurría gave a speech to the China Development Forum on “Promoting Technological Innovation for New Sources of Growth.” That talk essentially summarized the OECD’s Innovation Strategy (see also earlier posting). What caught my eye was the following description of an expansive view of innovation:

The Strategy goes beyond R&D to describe the broader context in which innovation occurs. Let me briefly share with you some of its insights:
First, innovation is about extracting value from existing, traditional or emerging technologies to develop new services and business models. For example, the emergence of information and communications technologies (ICT) – like cloud computing – holds the promise of productivity gains. They help companies avoid heavy, upfront investments in IT infrastructure and staff in exchange for a sustainable, pay-as-you-go model, which can enable them to grow faster.
Second, knowledge assets – research, design, marketing, networks, software, data analytics – will increasingly drive growth and competitiveness. Today, companies often invest more in software alone than in machinery and equipment. According to sources in the car industry, these knowledge assets make up the majority of development costs for a new Volvo truck.
Other “intangible” elements, like design, branding and marketing, can also account for a huge share of a product’s value-added. These are some of the reasons why the world buys Apple phones, Ikea furniture or Nespresso coffee. Smart companies know that, when they invest in intangibles, they can better capture value from global trade.
Third, innovation is a key pillar of green growth. It helps to decouple growth from natural capital depletion. It addresses knowledge gaps and fosters new technologies that can help the transition towards greener growth. It is absolutely central in enabling green and growth to go hand-in-hand.
Last, but not least, innovation depends on people: on their knowledge, creativity and skills. Your recently-launched human resources strategy acknowledges that a better educated workforce is critical to move up the global value chain, and to ensure a more inclusive economic and social progress for China’s citizens.

I think that covers a number of key points: innovation is more that new tech and intangible play a big role. I know the Chinese audience was paying attention to Gurría’s comments. I hope American policymakers were listening as well.

Disney benefits from Marvel

Speaking of intangible assets, here is another story on company’s assets — this case, Disney and Marvel comics from the IP Value blog (“Disney’s release of Marvel’s The Avengers will begin an informative case study on IP as a value-driver“).

With today’s [Friday May 4th] U.S. introduction of the film, Marvel’s The Avengers, we will see the Disney hydra-headed marketing machine in action.

Tying the Marvel name to the movie title is working. Almost all of the movie theaters and web move-time-listings services are adding the Marvel name to the title of the movie;
Licensees are lining up, from the logical (Hasbro,) to the not-so-likely, Wyndham and Harley Davidson;
Disney expects licensing revenues to exceed box-office revenues (a look into ktMINE, the license and royalty rate database, reveals 9 pre-Disney Marvel licensing agreements with an average royalty rate of a hefty 8.3% of net sales);
International sales are expected to set records.

Disney paid $4.2 billion for Marvel. We will see how quickly and much that investment pays off. Already in its weekend debut, the film broke box office records and is predicted to gross over $1 billion in global box office sales. Disney clearly recognized that Marvel was an addition to its asset base that could be used to could be used to leverage its existing assets — and be leveraged by them.

Facebook's intangible capital

An interesting piece in the Financial Times (Lex in depth: Facebook) that, as its title implies, takes a close look at the upcoming Facebook IPO. The article raises a number of questions about the possible valuation of the company, based on questions about the business model. What it really raises are questions on Facebook’s intangible capital:
Vulnerable strategic capital – in contrast to Microsoft and Google:

It is hard to quit using Microsoft’s software or Google’s search engine, not just because of network effects but also because almost everyone needs to do things those tools make possible. Competitors are more expensive or not as good. Facebook simply is not essential to life or work in the same way.

Vulnerable relational capital – based on the balancing act between customer wants and advertisers needs:

Advertisers could end up offering stuff people actually want. And privacy protection features will be put in place. But the issue is whether what Facebook does to increase the value of the data it collects makes users enjoy Facebook less and use it less. Users might start to think they are the product not the customer. Not a fun feeling.
The contrast with Google is striking. If Lex types “HP 12C calculator” into Google, it is setting itself up to see a certain kind of ad alongside search results. Indeed, users often have commercial intentions when they search. This is absolutely not the case on Facebook. And if the company cannot target ads without turning off users, revenue growth will slow, and soon.

In other words, Google’s strategic capital is grounded in the irreplaceable function of its product (i.e. the need for a search engine). As long as its product continues to be the best in meeting that function, it has strong strategic capital. Google’s relational capital is based on the complementarity of user needs (i.e. customers and advertisers are using the product for similar purposes). Facebook has neither of these strengths.

Select Tweets 4/30/12-5/6/12

April employment

The BLS employment data for April is out and many will see it as a disappointment. Employment increased by 115,000 jobs while, once again, the unemployment rate dropped by 0.1% to 8.1%. Economists had expected up to 168,000 new jobs (with some low predictions of 125,000 to 89,000). April’s job growth came closer to that figure if you count just private sector jobs, which grew by 130,000. But continued government jobs cuts — a lose of 15,000 jobs in April — drove the total down.
In some good news, the jobs numbers for February and March were revised upwards.
Unfortunately, the number of involuntary underemployed increased, both the number of workers who could only find part time work and the number of individuals working part time because of slack work or unfavorable business conditions. The biggest increase was with those who could only find part time work. This may be a worrisome indicator that companies continue to be reluctant to hire full time workers.
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Anti-servitization

I’ve write a lot about the fusion of manufacturing and services. In the most recent, I explicitly mention the concept of “servitization” — where a company sells as product as part of a service. In many cases, this takes the form of a after-sales service contract. But here is the counter-case of a successful strategy that specifically eschews the servitization model, from a recent Strategy+Business article “China’s Mid-Market Innovators”:

China’s rapid expansion of buildings and infrastructure has involved widespread subcontracting, with work on all sizable projects shared among a chain of hundreds or even thousands of small businesses. Most of these Chinese construction subcontractors think in the short term. They want equipment that is good enough to do the immediate job, and that will then be written off after five years or less. They are not interested in expensive, feature-rich products with a long life span supported by service contracts.
This type of segment is hard to penetrate for non-Chinese heavy equipment manufacturers, such as Caterpillar (U.S.), Liebherr (Germany), and Komatsu (Japan). These manufacturers follow well-established business models with buyers who, supported by long-term financing, think on a 10- to 15-year time span. Equipment must both last a long time and have the service needed to keep it operating with as few interruptions as possible.
Meanwhile, upstart construction equipment manufacturers have emerged to serve China’s fragmented construction industry. They sell low-cost machines that typically do not get expensive servicing, but are replaced when they wear out. The manufacturers focus on only a small range of related products, and keep their prices ultracompetitive by restricting investment only to functions and features that are strictly needed. Their versions of multinational products might not pass muster in Canada or Denmark, but they are considered superior in China.

Having said that however, the article hints that this “throw-away” strategy may be just an interim phase as they move into other markets:

Already, some of these mid-market construction equipment companies are becoming global powerhouses. For example, Sany Heavy Industry Company — founded in 1994 in Changsha, the capital city of Hunan province — became the world’s largest concrete pump manufacturer in 2009; its total revenues in 2010 approached $8 billion. In 2012, Sany announced that it would acquire the second-largest producer, the German company Putzmeister, and it has built plants in the U.S., Brazil, India, and Germany, as well as a major R&D center near Cologne. Other construction equipment manufacturers expanding outside China include ZoomLion (also based in Changsha), XCMG (a state-owned company headquartered in Xuzhou), and Shandong Heavy Industry Group. They all got their start by selling to China’s fragmented construction industry.

Even if the companies eventually abandon the throw-away strategy, its success in China raises an interesting point. Will there always be a market for pure manufactured goods, not tied to services? I think there will be. After all, many people are happy to just buy a fire alarm/smoke detector without signing up for a security monitoring service. We need to keep in mind that the I-Cubed Economy runs on multiple strategic models.
What is common, however, is the role of intangibles. Even pure manufacturing as an output requires intangibles as an input. The reason why the Chinese equipment company strategy works is because they have a clear understanding of exactly what features their customers want — and have the design and engineering capabilities to provide for that want. It may not be a high value added product compared to some of their competitors. But it is an appropriate value added product. And getting to that point of being appropriate takes a lot of knowledge (intangibles) inputs.