The New New Economy: More Startups, Fewer Giants, Infinite Opportunity

offering a differing view from kengy

The New New Economy: More Startups, Fewer Giants, Infinite Opportunity

from Wired Top Stories by Chris Anderson

As the Internet was taking shape in the late 1980s, an MIT professor named Tom Malone started thinking about how it could change the structure of industries. In a series of papers, he predicted that the big top-down companies of the 20th century would soon "decentralize and externalize" into industry ecosystems.

"Imagine an AT&T that breaks up into not two or three different companies but two or three hundred thousand different companies," Malone told Wired in a July 1998 interview. "This sort of voluntary, radical disaggregation is an attractive alternative for some large organizations."

It simply stood to reason: Huge vertically integrated conglomerates were created to minimize what economist Ronald Coase called transaction costs between teams and up and down the supply chain. Now distributed-information networks would do the same outside the walls of a single company. The Web would be globalization taken to the extreme. Projects would be open to the best of breed anywhere, creating virtual flash firms of suppliers and workers that would come together for one product and then re-form for another. "Small pieces, loosely joined" was the mantra.

But out in the reality of the world's great industries, the opposite seemed to happen. Corporations just kept getting bigger. On Wall Street, Goldman Sachs was pulling in almost $90 billion a year, tripling annual revenue in less than a decade. The pharmaceutical industry consolidated through hundreds of mergers and acquisitions. The Fortune 10, which today includes Wal-Mart and General Electric, more than tripled in size since 1990. And AT&T, far from breaking up into 300,000 different companies, became even bigger than before and, once again—at least for iPhone users—a monopoly.

And then last September it all came toppling down. Those big financial firms turned out to have been inflated by debt at levels never before seen (and hopefully never repeated). The big car companies crashed head-on into skyrocketing oil prices and plummeting consumer demand. Big Pharma ran out of blockbusters. Wal-Mart kept closing stores, while GE tried to sell off divisions. (OK, AT&T is still an iPhone monopoly, but give it time!)

So now, in the graveyard of giants, it's worth asking: Was Malone right? Was his age of nimble mammals simply delayed by the final march of corporate dinosaurs into the tar pits?

This crisis is not just the trough of a cycle but the end of an era. We will come out not just wiser but different.

What we have discovered over the past nine months are growing diseconomies of scale. Bigger firms are harder to run on cash flow alone, so they need more debt (oops!). Bigger companies have to place bigger bets but have less and less control over distribution and competition in an increasingly diverse marketplace. Those bets get riskier and the payoffs lower. And as Wall Street firms are learning, bigger companies are going to get more regulated, limiting their flexibility. The stars of finance are fleeing for smaller firms; it's the only place they can imagine getting anything interesting done.

As venture capitalist Paul Graham put it, "It turns out the rule 'large and disciplined organizations win' needs to have a qualification appended: 'at games that change slowly.' No one knew till change reached a sufficient speed."

The result is that the next new economy, the one rising from the ashes of this latest meltdown, will favor the small.

Take Detroit. The only way for the Big Three to survive, Charles C. Mann writes in "Beyond Detroit", is to harness the innovation of the myriad startups working on automotive technology.

Or take Google. As Steven Levy explores in "The Secrets of Googlenomics", the company deploys a bottom-up model for ad sales, dictated not by firm handshakes but by hard math.

Or even society at large. A century ago, mass collective action could be organized only by the state. Now we have the Web. Kevin Kelly resurrects socialism—without the state—in "The New Socialism".

To all the usual reasons why small companies have an advantage, from nimbleness to risk-taking, add these new ones: The rise of cloud computing means that young firms no longer have to buy their own IT equipment, which helps them avoid having to raise money or take on debt. Likewise, the webification of the supply chain in many industries, from electronics to apparel, means that even the tiniest companies can now order globally, just like the giants. In the same way a musician with just a laptop and some gumption can accomplish most of what a record label does, an ambitious engineer can invent and produce a gadget with little more than that same laptop.

"Involuntary entrepreneurship" is now creating tens of thousands of small businesses and a huge market of contract and freelance labor. Many will take full-time jobs again once they become available, but many others will choose not to. The crisis may have turned our economy into small pieces, loosely joined, but it will be the collective action of millions of workers hungry for change that keeps it that way.

Chris Anderson (canderson@wired.com) is Wired's editor in chief.

Who Says Innovation Belongs to the Small?

New York Times, May 24, 2009
By STEVE LOHR

FOR more than a decade, the prevailing view of innovation has been that little guys had the edge. Innovation bubbled up from the bottom, from upstarts and insurgents. Big companies didn’t innovate, and government got in the way. In the dominant innovation narrative, venture-backed start-up companies were cast as the nimble winners and large corporations as the sluggish losers.

There was a rich vein of business-school research supporting the notion that innovation comes most naturally from small-scale outsiders. That was the headline point that a generation of business people, venture investors and policy makers took away from Clayton M. Christensen’s 1997 classic, "The Innovator’s Dilemma," which examined the process of disruptive change.
But a shift in thinking is under way, driven by altered circumstances. In the United States and abroad, the biggest economic and social challenges — and potential business opportunities — are problems in multifaceted fields like the environment, energy and health care that rely on complex systems.

Solutions won’t come from the next new gadget or clever software, though such innovations will help. Instead, they must plug into a larger network of change shaped by economics, regulation and policy. Progress, experts say, will depend on people in a wide range of disciplines, and collaboration across the public and private sectors.

"These days, more than ever, size matters in the innovation game," said John Kao, a former professor at the Harvard business school and an innovation consultant to governments and corporations.In its economic recovery package, the Obama administration is financing programs to generate innovation with technology in health care and energy. The government will spend billions to accelerate the adoption of electronic patient records to help improve care and curb costs, and billions more to spur the installation of so-called smart grids that use sensors and computerized meters to reduce electricity consumption.

In other developed nations, where energy costs are higher than in the United States, government and corporate projects to cut fuel use and reduce carbon emissions are further along. But the Obama administration is pushing environmental and energy conservation policy more in the direction of Europe and Japan. The change will bolster demand for more efficient and more environmentally friendly systems for managing commuter traffic, food distribution, electric grids and waterways.

These systems are animated by inexpensive sensors and ever-increasing computing power but also require the skills to analyze, model and optimize complex networks, factoring in things as diverse as weather patterns and human behavior.

Big companies like General Electric and I.B.M. that employ scientists in many disciplines typically have the skills and scale to tackle such projects. Their advantage is in "being able to integrate innovations across these complex systems," said James E. Spohrer, a scientist at I.B.M.’s Almaden Research Center in San Jose, Calif.

Technology trends also contribute to the rising role of large companies. The lone inventor will never be extinct, but W. Brian Arthur, an economist at the Palo Alto Research Center, says that as digital technology evolves, step-by-step innovations are less important than linking all the sensors, software and data centers in systems.

Today, Mr. Arthur said, the unfolding "digitization of the economy" is in some ways a modern rerun of past technology waves, from steam power to electricity. "It’s not individual inventions that matter so much, but when large bodies of technology come together and have an impact across the economy," he said. "That’s what we’re seeing now."

In computing, some technological frontiers require size and deep pockets. To be competitive in Internet search and some other Web services, which cater to hundreds of millions of users worldwide, a company must build data centers of gargantuan size, and only a handful of companies can design and afford them, led by Google and Microsoft.

"There are just a few companies in a position to do computing and process data in a way never done before," observed Richard F. Rashid, Microsoft’s senior vice president for research.
The innovation tilt toward big companies, to be sure, is a rebalancing. There is still plenty of bottom-up innovation, including promising start-ups in the environmental and energy businesses. At the individual level, tinkering users have made significant contributions in fields as diverse as software and sporting goods.

STILL, the pendulum of thinking on innovation does seem to be swinging toward the big guys. In health care, institutions that have done best in improving the health of patients with chronic conditions like heart disease and diabetes have been larger, integrated systems like Kaiser Permanente in California, Intermountain Healthcare in Utah and the Geisinger Health System in Pennsylvania. They have the scale and incentives to invest in things like wellness programs and electronic health records.

In a new book on health care, "The Innovator’s Prescription," Mr. Christensen and the co-authors, Dr. Jerome H. Grossman and Dr. Jason Hwang, say that such large integrated systems "have the scope to create within themselves a new disruptive value network."

In an e-mail message last week, Mr. Christensen, a professor at the Harvard Business School, said that big companies do tend to resist disruptive innovation but that size need not spell failure. "The good news is that, once they recognize the benefits of disruptive thinking," he wrote, "the big companies have all the resources necessary to induce change."

Businessweek - Think Twice about being first to market, 19 May

2004, David Cohen had an idea for a social network for mobile phones that would connect users in the real world. His Boulder (Colo.)-based company, called iContact, raised $600,000 from investors and the founders' contributions, launched a beta version, and seemed poised to tap the much hyped mobile software market. Cohen, then 36, had already founded a successful software company. But after 18 months, he was unable to get phone carriers to distribute his software, and he shuttered the company, returning 80% of his investors' money. "Everybody was saying mobile was coming, it was going to be open; GPS was coming, it was going to be great," says Cohen. "That didn't really happen for another four years."

Bets on mobile applications didn't begin to pay off until Apple's (AAPL) iPhone app store opened the market in 2008. Several companies that followed iContact's path later found more traction, including Loopt, Mig33, and Brightkite, a startup Cohen invested in which was acquired last month by competitor Limbo.
The Real Competitive Advantage

Conventional wisdom says being first to market creates a competitive advantage. Reality is more complicated. Market opportunities are constantly opening and closing, and a hit idea at one point could be a dud a year earlier or a yawning "me too" business a year later. It's tough—likely impossible—to pinpoint the best moment to enter a market, but common sense dictates new entrepreneurs can improve their odds if they weigh how much they stand to gain or lose by waiting.

New academic research suggests one way entrepreneurs can evaluate whether they should enter a market first or wait on the sidelines. The decision depends on how hostile the learning environment is; that is, how much entrepreneurs can learn by observing other players before they launch compared to what they learn from participating after they enter, according to Moren Levesque, an entrepreneurship researcher at the University of Waterloo. Levesque, along with professors Maria Minniti of Southern Methodist University and Dean Shepherd of Indiana University, used a mathematical model to weigh the risks and benefits of entering the market early. Their research, published in March in the journal Entrepreneurship Theory and Practice is among the first to explore "how different learning environments may influence the entry behavior of entrepreneurs." (Note: The article is behind a pay firewall.)

The crux of the academics' findings on timing is this: In a hostile learning environment, entrepreneurs gain relatively little benefit by watching others. For example, if the relevant knowledge is protected intellectual property, studying the market before entering wouldn't yield much advantage. In these situations, the trade-off favors entering early. But in less hostile learning environments, where entrepreneurs gain valuable information likely to increase their success just by watching other companies, companies benefit from waiting and learning lessons from earlier players. IContact's successors, for example, may have learned from watching the company's trouble getting mobile networks to distribute their software, a barrier that was removed by the iPhone's app store.

"If you enter early, you are more of a pioneer. You can have a competitive advantage," by locking in key customers, suppliers, or intellectual property, says Levesque.

User-Driven Companies Should Start from Within

Lee Bryant argues the following in his presentation here...

• User-driven Innovation and co-design are great; plus, it is a real source of competitive advantage and can build closer relationships with customers and partners.
• Open source communities and crowdsourcing are great co-production models if they can be successfully applied beyond the technology world.
• We already have some good user-driven examples, such as Digg, Dell Ideastorm and even potato crisps, but how do we take this further and 'bake in' this model into business culture in general?
• The way Twentieth Century companies talk to customers is problematic. They treat them as a mass, a herd, to be segmented and messaged. The notion of CRM and call centres involves spending lots of money (and wasting your customers' time) to keep your customers at arms length, and in many cases to make them hate you. How can we change that? Doc Searls' model of VRM might be one way. Are there others?
• The downturn is an opportunity to change this. As the tide recedes, it is exposing many business models as too costly. As Umair Haque mentioned elsewhere at the conference, using VC money to 'buy' audience or customers is no longer a good option. Flat, responsive structures will succeed better than the model of mass marketing and segmentation. What can we learn from Threadless, for example, that can be applied to larger businesses?
• Indeed, what is the goal of a company? Is it purely profit maximisation in the short-term, pure plunder or perhaps sustainable income over the long-term? In the past, business motives were often more balanced between profit and social status or respect.. For example, Hamburg was one of the principal cities of the Hanseatic League, which was an incredibly powerful trading network than spanned northern Europe, and was a successful model of co-opetition and shared value creation, rather than just short-term individual gain. Many corporates, such as Unilever and Cadbury began with very strong social as well as financial goals. Even banks have traditionally been seen as a profession with codes of conduct and a long-term custodian role in the financial sector. It is only recently that executives such as Sir Fred Goodwin have got the balance between their social status and their value extraction so badly wrong. He is not a popular or respected man, despite being rich.
• If we want to create truly user-driven companies, then we need to start on the inside and recast their relationship with both customers and employees. There is no point being open at the edges if you treat your employees like machines - you simply cannot deliver on the promise that way. Harnessing people power inside and out means allowing staff to be human and talk as humans, and using them to drive better relationships with customers.
• Companies that can do this are likely to succeed, but they also need to place value and faith in their ecosystem and networks to create a sense of common purpose (this may or may not be manifested in a brand identity) and create and share value around their mission.

Categories:

• Corporate,
• Media and Publishing,
• Public and Third Sector

Tags for this entry:

business, corporate, engagement, innovation, next09, userdriven

Types of Innovation

Stumbled across this article here which talks about different types of innovation

1. Foresight-powered vision-driven innovation
2. Modification and sustaining innovation
3. Open collaborative (industry) innovation
4. Jobs-to-be-done or user-driven innovation
5. Exploration and experimentation-based innovation

Good to acknowledge that not all innovation is the same and there are different forms of innovation. Looking for more articles on user-driven innovation.

Singapore Firms Turn to Bartering

By Mariko Oi Asia Business Report, BBC World, Singapore
16 May 2009

In northern Singapore, among many residential flats, there stands a huge six-storey building called Northlink.

It houses more than 500 small to medium sized businesses, or SMEs. They are the backbone of Singapore's economy, and yet they are the hardest hit by the current recession. Since the global credit crunch spread to the city state, banks became nervous to lend - especially to SMEs. Alarmed by the situation, the government has announced that it will spend almost $4bn (£2.6bn) to stimulate bank lending in the budget.

But Singapore is experiencing its worst downturn in its history, with the economy forecast to shrink by much as 10% this year. And the freeze in credit markets is not yet thawing. So businesses are turning to alternative methods to pay their bills, a tactic once considered a last resort, namely the age old practice of barter trade.

Last resort
On the top floor of Northlink building, manager Malvin Khoo is busy finalising deals with his clients. He owns a Singapore based printing and packaging firm that employs 15 people.

"The greatest thing about bartering is I could be ordering a jumbo jet, or a yacht tomorrow," he quips. Obviously, that is "quite unlikely", he laughs, though he has managed to use a property in Malaysia to barter with. "It is the cheapest way to expand my business." Mr Khoo joined Barterxchange, a network of 600 businesses in Malaysia and Singapore, 18 months ago.

Instead of simplistic one-to-one direct exchange of goods and services, members go online.
Forget cash. They have their own universal currency.

Companies earn credits by offering their services and skills. They can then use them to get what they need from other members.
"I had some customers that I did packaging for, who had surplus plates," explains Mr Khoo. "So I structured to trade $20,000 worth of plates to restaurants. Some of them were just opening up so they needed new plates."

In return, Mr Khoo scored free meals at various restaurants. One of them is Megumi Japanese restaurant, which has sold dining vouchers worth more than $10,000.

"Not only did we get free webpage design and printing services by bartering, we also got some tremendous exposure to the business community," says managing director Hazel Hok.
"We used to be a local neighbourhood restaurant, but we have seen a significant increase in corporate functions."

New members
And there is no geographical boundary. Asia's biggest barter trade site is connected to more than a dozen global websites, where half a million companies participate. "We have even sent electronic goods to Nigeria," says Lee Oi Kum, executive chairman of Barterxchange.

The industry is now worth over $8bn annually, according to the International Reciprocal Trade Association. And its popularity is rising. Barterxchange has seen a 30% jump in its membership since 2007. Companies cannot operate solely by bartering. But it definitely offers alternative methods to make things a little easier.

Australia to offer 40% R&D tax credit

Extracted from FT

Australia to offer 40% R&D tax credit

By Aban Contractor in London

Published: May 17 2009 23:45 | Last updated: May 17 2009 23:45

Foreign companies will be able to claim 40 cents for every dollar invested in research and development under new rules to be introduced by the Australian government.

Senator Kim Carr, the minister for innovation, industry, science and research, said companies would be eligible even if the intellectual property were owned outside Australia. “This is the biggest increase since records began and the biggest change to business innovation support in more than a decade,” he said.

The 40 per cent tax credit, to be introduced from July next year, would offer “more generous and more predictable incentives for doing R&D in Australia”, he told the Financial Times on Sunday.

The scheme, to be managed through the Australian tax-return system, would have no turnover limit.

“People in the public research and innovative business sectors have praised us for increasing funding [in the recent federal budget] despite the global recession,” said Mr Carr.

“They’re missing the point. We aren’t making these investments despite the downturn – we’re making them because research and innovation are the key to accelerating recovery.”

Mr Carr said the Labor government came to office at the end of 2007 aware that Australia “was falling behind in the race to the top”. The rise of innovators such as Russia and, in particular, China was threatening to see Australia slip back even further.

Mr Carr said the government had a 10-year strategy to boost Australia’s innovation capacity and performance. Last week’s federal budget included A$3.1bn ($2.3bn, €1.7bn, £1.5bn) in new money for research and innovation, with total funding to reach almost A$8.6bn in the financial year beginning in July.

Mr Carr said the R&D tax credit would replace the complicated and outdated R&D tax concession.

Under the old system, foreign companies had to apply for an “international premium” for reimbursements. Industry feedback showed that the unpredictability of the system provided little or no incentive for companies to invest in new projects, or for multinationals to locate their R&D in Australia.

According to figures seen by the FT, in 2007-08 fewer than 20 companies registered for the premium.