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February 2012

Favorite Schumpeter columns, Part 1

My favorite part of The Economist is the Schumpeter column at the end of the business section, so for today’s post I decided to list some of the columns I have enjoyed the most. There are so many of them I like (even when I limit myself to those published in the last two years) that this post will be in several parts, with the second part being posted this Thursday. The Economist’s columnists change every few years, so I don’t know if the columns mentioned below are the work of a single person, and although they are definitely not written by someone named Schumpeter, I will refer to the author as Schumpeter below for convenience. The columns consistently discuss the most important trends in business and quote cutting-edge business research in the most recent academic journals or conferences. They are well worth reading every single time.

Here we go, in no particular order:

“Planning for the sequel: how Pixar’s leaders want to make their creative powerhouse outlast them” (June 19th, 2010)

Pixar’s president was 65 and its chief creative officer was 53 when the column was published, which raised questions as to their successors at the moment when Toy Story 3 was about to open in theaters.  Schumpeter attributes Pixar’s success to two factors:

  1. “the company puts people before projects… Pixar starts by bringing in creative people and then encourages them to generate ideas.” The column gives the example of Brad Bird, who oversaw “The Incredibles” and “Ratatouille.”
  2. “the company devotes a lot of effort to getting people to work together… Pixar… tries to foster a sense of collective responsibility among its 1,200 staff.”

What I find fascinating is that Pixar apparently got the idea for its creative process from Toyota and its lean production system, especially the constant feedback loop.

“The art of management: business has much to learn from the arts” (February 19th 2011)

In Schumpeter's words, Jamie Anderson and his co-authors for “The Fine Art of Success” (which as a side note is published by Wiley, has a grand total of 200 pages and sells for $38.95, or $29.60 if you order the book from Amazon, showing yet again that academic publishers operate on a different business model than many of their counterparts) "point out that many artists have also been superb entrepreneurs. Tintoretto upended a Venetian arts establishment that was completely controlled by Titian. He did this by identifying a new set of customers… and by changing the way that art was produced… Damien Hirst… realized that nouveau riche collectors would pay extraordinary sums for dead cows and jewel-encrusted skulls. He upturned the art world directly through Sotheby’s, an auction house.”

Schumpeter continues: “Many of the world’s most successful businesses are triumphs of story-telling.” He also argues that the art world has centuries of experience managing prima donnas, who can now be found as the top performers of many companies. The arts can also help companies in their quest to unlock creativity.

“The bottom of the pyramid: businesses are learning to serve the growing number of hard-up Americans” (June 25th 2011)

Excerpt: “Management gurus have rhapsodized about “the fortune at the bottom of the pyramid” in emerging markets ever since C.K. Prahalad popularized the idea in 2006… But when it comes to the bottom of the pyramid in the rich world, the gurus lose interest.” Schumpeter points out that “even in one of the world’s richest countries [read: the U.S.] the hard-up represent a huge and growing market… This is a challenge to the American dream. But it is also an opportunity for clever companies.”

McDonald’s, Walmart and Target are thriving, but the German discounter Aldi, which “has been doing surprisingly well in America, too” is the one covered in detail in the column, from its supply chain model to the size of its stores. “Aldi’s success highlights an interesting fact: that there is a lot of innovation in this market.” Popular models include:

  1. Paying for things upfront (such as prepaid wireless cards)
  2. Collaborative consumption (such as swapping DVDs or children’s clothes)

If American companies don’t seize these new opportunities, then this niche will be filled by foreign companies: “Emerging giants such as India’s Tata and China’s Haier regard America as a natural market for their frugal products.”

“The guru of the bottom of the pyramid: C.K. Prahalad’s death on April 16th has deprived the world of a great management thinker” (April 24th 2010)

C.K. Prahalad, a distinguished professor at the University of Michigan and frequent contributor to Harvard Business Review, “was the most creative management thinker of his generation,” who “revolutionized thinking on two big subjects, business strategy and economic development, and made a significant contribution to a third, innovation.”

  • With respect to business strategy, he believed that firms should “capitalize on their advantages to redefine markets in their favor” rather than simply competing in their existing markets.
  • With respect to innovation, he “argued that company-centric innovation was giving way to co-creation, in which firms collaborate with their customers and business allies.”
  • Finally, with respect to economic development, he “argued that the world’s poor represented trillions of dollars’ worth of pent-up spending power” and that innovative companies “were learning how to turn these people into paying customers.”

You can find Prahalad's HBR articles here and his books here. According to Schumpeter, his success might have been due to the fact that he “was an outsider in the American dominated world of management theory” displaying a certain amount of “intellectual restlessness”, evidenced by his always working with a collaborator and “never wr[iting] more than two articles on the same subject.” The loss to management thinking is certainly enormous. As his legacy-making contribution, he “taught everyone to see the developing world not as an also-ran but as a vortex of innovation and creativity.”

“Angst for the educated: A university degree no longer confers financial security” (September 3rd 2011)

Highlights:

  • “The best and the brightest of the rich world must increasingly compete with the best and the brightest from poorer countries who are willing to work harder for less money.”
  • “Several economists… have begun to argue that post-industrial societies will be characterized not by a relentless rise in demand for the educated but by a great “hollowing out” as mid-level jobs are destroyed by smart machines and high-level job growth slows.”
  • Also read what David Autor and Thomas Malone, both of MIT, and Alan Blinder of Princeton have to say about this trend, especially Malone’s opinion about “the application of the division of labor to brain-work”.

Entrepreneurship, Creativity and Regional Development

Today’s post will be a summary of a 2002 paper by Richard Florida entitled “Entrepreneurship, Creativity and Regional Development”, available here.

The main thesis of the paper is that entrepreneurship, far from being spurred for the most part by lone, heroic individuals, “is a social process that stems from a broad set of social and cultural conditions.” Florida views entrepreneurship as an ethos that, according to a recent survey, the majority of Americans aspires to because it allows them to express their creativity. Florida distinguishes three mutually dependent types of creativity: (1) technological creativity (innovation), (2) economic creativity (entrepreneurship) and (3) artistic and cultural creativity.

The paper emphasizes “the role of places as incubators of creativity, innovation, and new firms and industries.” To this date, firms tend to cluster together. To explain regional growth, Florida resorts to the human capital theory of regional development, based on the ability of the most dynamic cities to attract highly educated and productive people. According to Florida, these regions share the following characteristics:

  • Thick labor markets (if you need to leave your job for any reason, you want a reasonable assurance that you can probably find something similar in the same area).
  • Quality of place (in terms of neighborhoods, the sort of people who live there and the amenities, such as sidewalk cafés or restaurants).
  • Diversity.

Florida’s theory “suggests that places that are open to creativity… reflect an underlying environment or habitat which favors risk taking and thus will stimulate entrepreneurship and new firm formation.” Florida reiterates his model of economic development called the 3 T’s: technology, talent and tolerance, which occupies a prominent place in his book The Rise of the Creative Class. In his opinion, an unwillingness to be tolerant enough explains why, as of 2002 when the paper was written, places like Pittsburgh and Baltimore had failed to fulfill their potential as creative meccas.

Florida’s team members relied on the following metrics to develop their insights:

  • High Tech Entrepreneurship Index
  • Innovation Index
  • Gay Index
  • Bohemian Index (a measure of artistically creative people)
  • Talent Index
  • Melting Pot Index
  • Composite Diversity Index
  • Creative Class
  • Creativity Index (based on High Tech Entrepreneurship, Innovation, Gay Indexes and the Creative Class).

The purpose of the paper was to study the correlation between high tech entrepreneurship and other variables. It turns out that:

  • The correlation between the Creative Class and the High Tech Index is 0.38, and as such positive and significant. (Correlation is a number between -1 and 1, for those of you who forgot.)
  • “The Bohemian Index correlates with the High Tech Index at 0.64 and the Innovation Index at 0.60.” (Correlations above 0.30 are high and above 0.50 are very high.)
  • Correlation between the Melting Pot Index (measuring immigration) and the High Tech Index is 0.26.
  • Correlation between the high-tech index and the gay index is 0.48.

Florida concludes: “In order to succeed as a region and promote innovation and entrepreneurship, a region must establish a multi-dimensional creative community.” He advocates the creation of a “people climate” rather than a “business climate.” Unfortunately, the paper ends before he can provide specific guidelines.

In particular, how can a region that has been left behind in the changing economic landscape catch up with its most prosperous counterparts? It’s a bit of a chicken-and-egg conundrum: before a critical mass of creative types has moved to an economically depressed area that is attempting reinvention, the sort of amenities that appeals to said creative types will fail to be economically viable (if they were, these amenities would already exist and would already have attracted creative people), but members of the creative class have few reasons to move to such an area – as opposed to an area where many creative people already live – until such amenities are in place. In addition, the influx of creative people might increase social inequality, as Florida mentions in his book The Rise of the Creative Class, leading to resentment from the locals – a sign of intolerance that goes against making the area attractive for creative newcomers.

The labor market in an area that struggles to reinvent itself will not be thick (if it was thick, the business community would not have to count on the creative class to bring renewal) and the area will most likely not be welcoming of newcomers, educated or otherwise, at least until unemployment comes down. Also, if we continue to focus on a depressed area, it is not clear that the nice-to-have amenities dear to the creative types would be the best use of that money, although it depends on whether this is public money or the money of real estate developers.

But the addition of a few large companies, with the vast array of employment opportunities they offer, could bring about enough positive change in the economic landscape to make the Creative Class more palatable to what Florida refers to in his book as the Working Class and the Services Class.

While all of Florida's ideas above can certainly be implemented in semi-creative areas that want to take positions of economic leadership in the near future, I can most easily picture high-tech entrepreneurship as the lead factor in the transformation of a formerly blighted area into a (sort of) creative community.

It seems that advanced or sustainable manufacturing would have a high chance of spurring growth in a depressed region by providing not only creative work (marketing, design, etc) but also entry-level jobs for local factory workers who can then rise through the ranks. As far as entrepreneurship is concerned, this requires the jump from tiny start-ups to companies with a bigger employment footprint, i.e., the successful scaling of high tech innovation. Then the factory workers can, maybe, even become members of the Creative Class.


TEDxBigApple, cont'd

This is a continuation of my previous post on the TEDxBigApple event. The theme of the conference was "disruptive ideas", with a focus on ideas that could change the world within 3 to 5 years. Please read my other post for a brief overview of the talks.

Something interesting happened a few days after the event. The organizers tried to help attendees continue the conversation with each other and set up a group on GroupSpaces, but the system apparently does not allow email digests, so any email people wrote introducing themselves and describing why they were interested in innovation was sent right away to all the recipients.

This means that attendees received - according to my email software - a grand total of 32 emails from the list within a few hours. These were short emails with a clear title that left no ambiguity as to their link to the TEDxBigApple event. They were easy to set aside if recipients were not interested in learning more about their fellow attendees. The wave of emails was also not supposed to last long, since the frequency of messages would presumably have decreased once people interested in introducing themselves had done so and there were about 250 attendees to the conference. Yet these emails unleashed many complaints and the group was shut down, replaced by a LinkedIn list.

Now, I do not know GroupSpaces but I am very clear about one thing: if you care about innovation you do not want to be caught anywhere near LinkedIn. My goodness, years after it was launched LinkedIn still does not have an option that allows former students to invite their teacher to connect, forcing them to describe said teacher as "friend". (Maybe I should have made those tests even harder...) It is a glorified resume-hosting service that helps members stay up-to-date with the career of the people in their network, and that it does very well. But I have zero interest in its groups and mailing lists, although I find myself belonging to a few (and never read the corresponding emails). LinkedIn does have a daily/weekly digest feature, which apparently soothed some attendees.

This incident taught me that some people say they are interested in innovation, but they take a very passive role in it. To their credit, they do want to learn - not everybody does. But they could have watched the conference on simulcast; they showed no particular inclination in learning about the rest of the audience, in spite of the impressive attendees list (which one could view after registering for the event). The others, like me, don't want to limit themselves to a one-way flow of information, from speakers to attendees.

We - and the TEDx community as a whole, beyond the TEDxBigApple one - need a social platform that goes beyond listservs. Surely something good already exists, so please feel free to suggest websites in the comments (and if GroupSpaces deserves a rethink, please say so as well). In my mind I envision as the ideal system a site that is not as one-dimensional as comments on a YouTube video or a blog post stuck between columns of links, blog rolls, "other things you may like" and advertisements. I am a very visual person and I would rather see something that uses the whole page or even whole pages if resorting to tabs.

This idea of a more visual representation of information online has already been gaining ground: I don't have the New New Twitter yet but Old New Twitter did make a serious attempt in setting up the information in a 2D way by letting users follow a conversation in the right column, and the video preview of the New New Twitter suggests items will be even more arranged in multiple columns than before. Kudos to TweetDeck as well.

Blogspot also offers a 2D organization of posts such as "mosaic", "flipcard" or "snapshot" (see for instance the blog of the LU Greeks, aka fraternity and sorority members of Lehigh University). Friendorfollow.com, a website that allows you to see who you are following but isn't following you back on Twitter, also organizes its answers two-dimensionally. Newspapers such as The New York Times and The Washington Post make heavy use of columns on the front page of their website. You will notice, though, that only Twitter and TweetDeck are dynamic, and it is not clear that columns are the best way to organize information for collaborative sites where users should be able to have multi-way conversations with each other.

All this to say, someone somewhere is probably already working on this, and I hope the product is launched soon. In the meantime, let me just add a few words on what such a site could look like for a TEDx event. There could be a 2D list of attendees with their picture similar to what one sees in Google+ when one looks for people to add to circles, and any participant to the same TEDx conference could group other attendees in circles, tribes, etc, depending on how interested he is in these people's expertise or "ideas worth spreading", which would be part of their profile.

Then in a given circle/tribe/group/whatever, people's icons could be arranged depending on the active conversations they are part of and whom they have interacted with the most. (This would make a pretty network graph. We computer scientists just can't help ourselves.) Or there could be different icons representing different active conversations and more details would be provided if the computer mouse hovered over them.

Or there could be a wordle summarizing the main themes of the active conversations and people could click on the keywords that interest them the most and be redirected to those discussions. Wordles would also help understand the tenor of the conversation more quickly, instead of having to read all the comments to try to decide whether most people agree or disagree with the person who started the debate. Or there could be something completely different I haven't even imagined yet.

Am I truly the only one who think we can do better than a one-dimensional feed? I can't help but think that if we want to engage more people and foster innovation we have to provide a different structure than the traditional top-bottom, post-comment model. Scrolling down the page is getting old, especially given the size of today's (desktop) computer screens.

Maybe that will be the next disruptive idea.


TEDxBigApple

For today, a post on TEDxBigApple, which I attended last week at Saatchi & Saatchi. I really enjoyed the diverse set of talks with very engaging speakers, including several from academia. The program can be found here; according to the website we'll be treated to a summary of the event and the videos of the talks soon. In the meantime, here are my recollections of the talks (note that they were of varying lengths so for some I have less to say than for others, although they were all interesting):

  • Chris Downey, a San Francisco-based architect who became unexpectedly blind a few years ago following surgery, talked about the everyday challenges for a blind person in a world that people who can see want to make as noiseless as possible. Noise is what allows people like him to orient themselves, figure out when it is safe to cross the street, etc. I wish his talk had been longer so that he could have also discussed his job as a blind architect (something he said he would do in the second part of his speech; unfortunately he ran out of time and TEDx is quite strict in terms of time limit).
  • Jeffrey Brenner, whom Atul Gawande wrote about in The New Yorker back in January 2011 ("The Hot Spotters: Can we lower medical costs by giving the neediest patients better care?" about which I wrote a blog post here) talked about practicing family medicine in Camden, NJ and ultimately closing his practice due to skewed Medicare reimbursements that favor hospitals. He is now the founder and executive director of the Camden Coalition. Much of his talk was spent on the ideas described by Gawande in his article, so The New Yorker is a good place to start if you did not attend the talk but would like to know more.
  • Vijay Govindarajan of Dartmouth discussed reverse innovation, i.e., innovation likely to be adopted first in the developing world.
  • Kavita Parmar is the co-founder of the IOU project, which allows customers to trace back their clothing to the artisan who made it. Her goal is to disrupt traditional supply chains with their many intermediaries.
  • John Geraci spoke on DIY technology to improve infrastructure in major cities. He made a fascinating point about the issues related to transportation in NYC in the 19th century, due to the reliance on horses (with sanitation problems related to manure and horse cadavers) - the problem disappeared with the introduction of cars, showing the limits of incremental thinking. "Do we want a better kind of horses or do we want a better ride?"
  • Robert Langer, Institute Professor at MIT and recipient of the US Medal of Science, described his research on (1) controlled release systems that can be magnetically, ultrasonically, or enzymatically triggered to increase release rates and (2) new ways to create tissue and organs, including new polymer systems for tissue engineering. Langer's presentation was very engaging despite - or maybe because of - some graphic images, which included a little boy (his face was not shown) whose scars due to burns on his body were considerably lightened thanks to an innovative process in Langer's lab, and mice with spinal cord damage affecting their hindlegs, who were able to move not perfectly but far more easily using another innovation from Langer's team. This has obviously tremendous potential for humans with spinal cord injuries. Langer's talk concluded the program - a savvy choice from the organizers to end the day on a high note.
  • Joanna Aizenberg, a professor at Harvard, discussed biomimicry, or how nature has been solving complicated engineering problems for millenia. I loved the videos of the experiments and her demonstration. 
  • Aydogan Ozcan of UCLA also gave a great talk on innovation through photonics, specifically, the LUCAS (Lensfree on-chip cytometry and diagnostics) system, aka the "cellphone microscope", which has important health applications in developing countries. More information is available on Ozcan's website, for instance this page.
  • Bryan Roberts talked about the future of finance in biotech.
  • Nicola Twilley talked about the impact of refrigeration on food systems.
  • Tom Igoe talked about microprocessors, thingiverse.com and 3D printing being to today what clip art was to the 1990s.
  • Patrick Govang is "a green-tech innovator who is developing a disruptive model to enable local economic & resource sustainability". A former Cornell faculty member, he is now the founder and CEO of e2e Materials. I was impressed by his demonstration of how regular plywood breaks under his weight while his new biocomposite material does not, but even more by his model based on local supply chains and the concept of Regionally Integrated Manufacturing (tm). According to the company's website (which corroborates his presentation), the "facilities are planned to address market demand within a radius of 500 miles with the agricultural feedstocks intended to be sourced within 100 miles of the facility. All of the jobs created will be in the same regional economy where the product was produced - creating unparalleled, sustainable economic impact and employment opportunities spanning agriculture, manufacturing, sales and high-technology."
  • Nils Gums talked about the grassroots success of the band Karmin from YouTubers to major-label artists, which he helped engineer. We were also treated to the first broadcast performance of Brokenhearted, the band's new single (Karmin taped it especially for TEDx). Supposedly the band also sang it last Saturday when they hosted Saturday Night Live. I am not a pop music fan, but even I enjoyed the music, which says something.
  • Jerri Chou talked about social innovation.
  • There were also great TED videos featuring (separately) Clay Shirky and Tony Porter, as well as excellent live music.

 More tomorrow!


Open Innovation

Open innovation is defined by Dr Henry Chesbrough of UC Berkeley, who coined the term, as "the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. [This paradigm] assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology."

Chesbrough has popularized the idea through two books, Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business Review Press, 2003) and Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era (Jossey-Bass, 2011). In addition, he co-edited Open Innovation: Researching a New Paradigm (Oxford University Press, 2006), the chapters of which are available for free on the UC Berkeley website.

He wrote the first chapter of the OUP book, which can serve as a paper-length primer on open innovation. In particular, he states that "at its roots, open innovation assumes that useful knowledge is widely distributed, and that even the most capable R&D organizations must identify, connect to and leverage external knowledge sources as a core process in innovation." Examples of companies practicing open innovation include IBM, Intel and Procter&Gamble.

Chesbrough argues that the open innovation paradigm differs from previous innovation frameworks in many important respects:

  1. The critical importance of external knowledge in innovation.
  2. The centrality of the business model, often forgotten in other approaches.
  3. The recognition of the existence of assessment errors in evaluating R&D projects, in particular, false negatives, "where the project does not fit the company's business model, and is therefore not perceived as valuable to the firm".
  4. The recognition of purposive (rather than accidental) outbound flows of knowledge.
  5. The assumptions underlying the knowledge landscape (knowledge is assumed scarce in closed-innovation models, widely-distributed in open-innovation models).
  6. A new and proactive role for intellectual property management.
  7. The rise of intermediaries in innovation markets.
  8. The "development of new and different metrics for assessing the performance of a firm's innovation process."  

In an article published in the Summer 2011 issue of Strategy+Business, Chesbrough discusses how this paradigm applies to services innovation, in connection with the publication of his new book. He argues that successful manufacturers must reinvent themselves "as hybrid product-service companies that design their business models around creating more meaningful experiences for their customers."

Here are a few companies he mentions as already applying the open-innovation framework:

  • General Motors with the OnStar system
  • General Electric with its financing arm
  • Ikea, Apple and others with their own retail outlets
  • Amazon with its Kindle, its Amazon Web Services and the third-party marketplace
  • Xerox and its Managed Print Services
  • Taiwan Semiconductor Manufacturing Company "with its co-creation model for helping customers design computer chips, which it then manufactures to order". (This example is described at length in the article.)

Chesbrough, along with a colleague at San Jose State, Joel West, created a website for the open innovation community called openinnovation.net, full of resources for managers interested in learning further about this topic and implementing it in their own organization.