Flow to Stability

Wednesday, December 26, 2007

Thoughts on innovation based on a Christensen reading

Christensen's basic premise in the Innovator's Dilemma, which reflects prior management observations as he dutifully points out, is that firms that introduce a new technology focus their resources on incremental improvements of that innovation (sustaining innovation) because of the alignment between the needs of the stakeholders/customers that constitute their "value networks" and the middle management incentives to pursue projects with higher probability of success and higher margins for the firm. This creates a "northeast migration" as these firms try to penetrate the higher margin/higher volume upscale product markets and they and their clients fail to see the potential of the next "disruptive innovation".

Christensen's framework appears to work for the disk drive industry (his primary case) as well as the cable/hydraulic shovel market and the steel industry. This framework seems harder to apply in other industries like aviation, automotive, CPUs, and consumer electronics to name a few. Even for the disk drive industry, some of the laggards (e.g. Seagate appears to have recovered and continue to wield significant market power). These observations are not intended to invalidate the theory (firstly they are just that -- i.e. observations and not based on exacting research) but rather to identify the other driving forces that allow for these 'exceptions' and also visualize what the effect would be to the afore mentioned industries when disruptive innovation catches up with them.

Firstly a qualitative support of why I see them as different:
1. CPUs: Intel and AMD have been wielding a duopoly game for quite a while. Motorola's recently divested Freescale moved out of the PC business once Apple moved to Intel. No new entrants from below -- incremental innovation sustains the game as long as Moore's law works.
Potential game breaker: quantum computing and the new entrants that will start serving some currently unsuspected markets (talking robot friends, GPS's, autos?). Verdict: the rate of improvement of the industry's product is high enough that does not yet allow for new successful entrant.

2. Autos. The big two and a half are still there and going (perhaps not strong) but going. Toyota, Honda, Nissan, Renault, Fiat have been around for a while and are at varying degrees successful. Huyndai and the Chinese that follow their cost model are entering the market from below but not with a disruptive innovation technology. Hybrids (and electrics) were introduced by the established players... Is the patent conspiracy true? What happens to the innovators that have water-powered cars? (just joking) There are some start-ups that try to cater to the environmentally-conscious crowd with some interesting and innovative designs -- could they be the next wave? Verdict: the value chain is too big to recreate -- there is no under market and we are talking about a finished consumer product.

3. Electronics. Sony, Toshiba, Motorola, Phillips etc are all there. Diverse industry that allows for flops in one segment and recapturing later. Several waves of disruptive innovation technologies (records, cds, dvds, sacds, hd-dvd-- film, digital cameras -- matrix, ink-jet, laser ) yet no memorable underdog led the attack in any of these. It was a big league game all along. Verdict: consumer products and scale of the players allow the continuity. Competition IN the industry is so tough that brings forward the disruptive innovation within the established firms or perhaps that ability to embrace and further develop disruptive innovation is not atrophying fast enough due to the high clock speed of the industry.

4. Aviation. The manufacturers have been a duopoly for quite a while. Only incremental innovation since the jet propulsion (and even this is arguable). The regulatory and market structure and the physics of the product are such that minimizes the potential of an innovation from below. Besides, aircraft is and end product as well. Innovation like the BWB, propfans, etc will likely come from within.
For airlines, the disruptive innovation of low cost point to point travel has not rendered full service legacy carriers out of the market despite the upheavals. Although Southwest attacked from below in a textbook Christensen format that innovation was not enough to sustain the attack while the move of Southwest (and the rest of the LCCs) to the northeast quadrant of high margin business travel has not been complete.

To summarize, the following conditions make the exact repetition of Christensen's theory harder:
1. Final consumer products as opposed to OEMs suppliers (diffused customer base).
2. Regulatory and market conditions (e.g. scale and network economies) that support oligopolies hinder new entrants by the sheer size (critical mass) of the players.
3. Clockspeed: slower clockspeed industries allow adaptation of incumbents and very high clockspeed industries keep incumbents with honed skills in either seeking or embracing disruptive innovation.

Wednesday, December 5, 2007

One Laptop per Child vs. Intel Classmate

Observing the recent competitive efforts by Intel to preempt OLPC from monopolizing the market of low cost laptops was interesting.

Assuming that the OLPC, which is open source and user-serviceable, does not abide by the Sirious Cybernetics Corporation modus operandi of concealing the fundamental design flaws by superficial design flaws, it does have the potential of creating native hand-on knowledge of technology and applications by people and for the people.

Connectivity and ease of use for start-up applications is important. When I look back at my own budding relationship with PCs, gaming was the raison d' etre of computing and nothing extravagant at that. It was my father's insistence to push for programming skills that allowed my 14-year old self to get a rudimentary grasp of programming. Yet, I did not create anything useful then - programming everything from scratch was hard work with Turbo Pascal. But a well designed object-oriented with large module libraries basic programming environment, who knows? The second reason for the underutilization of this 8086 computing power was its inability to communicate to other machines and devices... They seem to have this designed in for OLPC.

So the Intels and Microsofts dislike open source as revenue potential is minimal and hence a the subversion of OLPC. Intel's faster but more expensive laptop and Microsoft's $1 OS and Office Suite licenses aim to prevent the creation of a generation of unix users.

Interesting to see how this plays out. The governments seem to align with the known utility (if you are generous) of an existing software/hardware proprietary platform vs. the uncertain productivity gains of creating literate and empowered computer experts. Questions to be considered: how successful can this self-learning be? Does it require other types of resource inputs in these societies?

On Metronomics


All things in moderation. For some reason the translation is as unsatisfying as the saying itself. On a personal level there are indeed points for which excess in the form of PATHOS (passion) and EROS (unbound love) may be called for. Not so for our OIKO-NOMIA (economics: the sustainement and distribution of resources in our homestead).

Modern economics have diverged quite drastically from where the ancient Greek derivation of the word was leading. That is why I felt we need to introduce a new term or concept or discipline to guide back economics to its roots: Metro-nomics.

On the inability to remember

This was supposed to be a short blog entry on some interesting thoughts I had this morning at the boundaries of sleep and wakefulness.

Now, after reading a few pages of Smil's Energy, having shaved, made and drunk fruit juice, checked online news, getting the recyclables out, inflating the bike tires and oiling the chain, having my wife frustrated about me being late, biking to the office and now opening an empty blog entry, it would have remained just that; an empty blog entry.

Next time, I should start by jotting down the thoughts although I do not believe firmly that the world would have been different if I did so :-) It seems that the critical activity that overwrote those ideas was reading from the book. Oh, well... In any case, I will remember later...

Tuesday, December 4, 2007

Knowldge of complexity and decision-making

A senior board member at an American airline and executive at a private equity firm that had recently bought this airline out of bankruptcy noted that the acquisition team did not expect three things after the buy-out:

1. The recent hike in fuel prices (buy was in 2004)
2. The difficulty in the negotiations with labor unions
3. The actions of competitors

I was left wondering whether they had actually planned the acquisition at all... This is not meant as denigrating their decision-making process or the individual who had the final say. It is rather the n-th anecdote on how businesses fail to use even basic system tools (nothing too complicated here, basic scenario planning and knowledge of history would suffice) in their decision making.

Of course hindsight is always 100% and not having to be part of the process does give one an advantage in criticizing from safety.

More importantly, despite these obvious, but apparently unforeseen, pitfalls the ailine is currently performing well. Given this, the point that came to my mind is what would have happened if they actually run the scenarios. If they considered scenarios with competitors messing their bread-butter markets, fuel costs tripling (from $30/bbl to $90/bbl) and the difficulty to "reason" with "militant" unions, what would the decision be?

Maybe "audentis fortuna juvet" or fortune favors the bold is a useful expression to have in mind even if the bold are audacious out of relative ignorance.

Herbert Simon's bounded rationality concept might fit well here as well as the later cognitive science literature might have exhausted this topic but hey there is always time to be continuously surprised...