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A tepid effort to stave off global warming

2009-12-23T08:14:00.000-08:00

Humankind’s ability to get together to solve complex problems was on test at Copenhagen. It failed.

Being a climate change skeptic of long standing, I am not easily given to deploring any unsuccessful effort to combat global warming. Yet the lack of a definitive outcome at COP15 (the 12-day UN summit on climate change held at Copenhagen from December 7th thru 18th 2009) was a loss. But not necessarily because it failed to meet it's purported aim of saving planet Earth from a death-by-warming fate.

While the world’s survival may not exactly have hinged on a positive outcome at Copenhagen, the summit nevertheless represented a test of humankind's ability to hammer out solutions to complex problems, many of which are certainly going to crop up in future. It is for this reason that Copenhagen’s failure to produce a definitive outcome is a pity.

Read my detailed opinion on How (not) to save the world in 12 days.

The Recession Has Begun to Recede

2009-07-11T01:41:00.000-07:00

Economic recovery has begun

I wrote in April that we need to be optimistic about a recovery in the world economy in 2009, and that there are likely to be concrete signs as early as July. At the time this statement appeared to be at odds with what many leading experts including senior government officials, economists and CEOs were saying (see details here).

How has the economy been faring since then, and what's the latest prognosis? The Conference Board's Leading Economic Index showed a rise of 1.2% in May - the largest in many years. This and other bright signs prompted Business Week to state on June 18th that the worst is over in the economy.

Perhaps most tellingly, the IMF - hardly known for taking an overly sanguine view on matters economic - declared on July 8th that "the world economy has begun to pull out of the recession".

Of course, the optimism needs to be tempered. There are still many indicators that are in the red. Large tracts of the world's leading economies remain steeped in weakness. The reverberations from the financial crisis and resulting credit crunch are yet to work themselves out fully, although they have gone past their trough. Unemployment remains high in the US and other Western economies. The IMF itself has released mixed figures for its growth prognosis over the next few quarters. Uber-Guru Warren Buffet remains skeptical about recovery anytime soon.

None of these points however can detract from the assertion, backed by the factors I had listed and now supported by the Conference Board and the IMFs' findings, that the recession has begun to blow over. What the observations in the foregoing paragraph do mean is that the slope of recovery is likely to be excruciatingly slow.

It thus appears safe to state that the world economy has definitively begun it's journey out of the quagmire of recession.

Update, July 19th 2009: Newsweek magazine, citing expert sources, has on July 14th declared that The Recession is Over.

Of Risk and Reward - and Rationality

2009-05-14T07:41:00.000-07:00

Why is human response to risk so frequently irrational?

Harvard Business Review editor Scott Berinato makes a highly pertinent point: Society's response to risk should be rational. In particular, he says, when confronted by admittedly horrendous possibilities such as those the Swine Flu scare threw up, overreaction is likely to result in wasted resources that could have been better used elsewhere.

I agree that resources should be allocated in perfect consonance with the risk-reward equation. However this is easy to say but very hard to do. In most real-world cases it is difficult to conclude whether a threat response was commensurate with the threat, even in hindsight.

Read my full opinion here.

Swallowing Sun, Oracle Casts a Longer Shadow Over the Tech Industry

2009-04-27T08:45:00.000-07:00

As the sun sets on one of the companies that created the technology industry as we know it, the landscape has changed forever

Oracle's purchase of Sun, while hardly a record-breaking deal in pure financial terms, is nevertheless among the most transformational events the technology industry has ever seen. With it, Oracle has just advanced its already-considerable credentials as a heavy-hitting titan of the technology industry.

The deal also represents a landmark move towards greater industry consolidation as IBM, Microsoft, Oracle, SAP and the eternal wild card - Google - slug it out in their ongoing efforts to emerge as undisputed leader of the industry.

What specific developments does the deal portend for Oracle, and for the industry at large? Read my opinion here.

I can't help feeling a certain sense of loss as one of the companies that created the industry as we know it rides away into the sunset. However, as I have observed before, the tech industry is no place to be sentimental.

And so, as the technology landscape is transformed by this mammoth union, times get more interesting than ever.

The Clouds of Recession: Blowing Over?

2009-04-16T08:11:00.000-07:00

Recovery is in sight for the world economy

Many of us have undoubtedbly wondered over the past few months as to when the world economy will shift into a decided phase of recovery from the current doldrums it is steeped in. I've certainly believed at least since late December that recovery will not be long in coming, and may even come as early as July 2009. Perplexingly, this cheery outlook has been at odds with most Gurus of economics and business, who have prophesied start dates for a definitive recovery typically in 2010. See here for a partial list of such prognostications from Dr Ben Bernanke, Steve Ballmer, the G7 Finance Ministers and the IMF.

And why have I been so filled with hope and cheer? The same post above explains five reasons.

To Be Simple is To Be Sublime

2009-02-18T08:04:00.000-08:00

The move towards simplicity gathers momentum.

Harvard's Prof. Rosabeth Moss Kanter writes that the next big thing is simplicity itself. This view is absolutely spot-on - and right after my heart. I've long lamented the propensity of companies - particularly in the technology industry - to overengineer their products, and predicted that the tide will turn decisively toward simplicity. The trend towards simplicity has begun a while ago, and has been gathering momentum for some time now. Quite simply, that's the way to go.

A State of 'Perpetual' Disruption?

2009-02-13T23:02:00.000-08:00

We live in disruptive times.

John Hagel, John Seely Brown and Lang Davison have recently advanced an intriguing proposition: That, driven by constant changes in technology, regulation, globalization and so forth, the historical 'punctuated equilibrium' worldview is now just that - history. In other words, they aver, the world is entering a state of permanent disruption. If this is true, all of us - economists, business folks, and common folk - will have to reconcile to a new reality where events are continuously disruptive, and businesses and institutions are always in a state of flux.

As expected, the horse sense view on this 'Perpetual Disruption' suggestion would be that we should, at the very least, seek much stronger evidence before we admit such a possibility. See my full take on this new idea here.

What Goes Around Comes Around

2008-11-28T23:14:00.000-08:00

Outsourcing and the circle of life

The ongoing financial crisis, and the economic downturn it seems certain to engender, is likely to bring job loss in America to the fore. Among other things, the outcry against outsourcing appears certain to rise to a crescendo over the next few months. Now, here's a new take that should make this outcy less worrisome. This comes in the form of a book called The Venturesome Economy - How Innovation Sustains Prosperity in a More Connected World.

The book by Prof. Amar Bhide, the Lawrence D. Glaubinger Professor of Business at Columbia University, argues that technological innovation is a complex, multiplayer game in which America still leads the world by a long way. American scientific, technological and economic pre-eminence are thus not going away anytime soon. The book goes on to argue that "neo-protectionist" fears are unwarranted, and shows how they will probably undermine America's economic might in the long run.

For my full review of the book see here.

As I've written in the review, the book while making its excellent and comprehensive thesis, misses out my favorite argument for why America should not discourage outsourcing. A lot of the prosperity that 'leaks away' from developed economies via outsourcing comes right back in the form of demand for products and services. As an example, Indian IT outsourcing companies are perhaps the largest airline customers in the world, as tens of thousands of workers travel each year between India and the countries where clients are located. These airlines such as United and Lufthansa are mostly headquartered in developed countries. Similarly, the same India-based outsourcers lap up the laptops, PCs, servers and networking equipment made by Dell, Sun and Cisco. They are huge buyers of software produced by Microsoft, IBM, Oracle and SAP. These companies (and their employees) can safely be assumed to have an insatiable appetite for the latest cellular phones and so forth from the likes of Apple, Nokia and RIM. These companies also employ legions of workers at or close to client locations - workers who pay taxes and pump money into local economies. Many of these companies are listed on US and European stock exchanges, allowing people there to participate in their wealth creation. Thus, prosperity 'leaking' abroad contributes to prosperity in the developed economies - not in some nebulous, long-term sense but in a way that is direct and almost immediate.

Another piece of reassurance for those exercised over job losses in America thru outsourcing come from this Booz study released on Oct. 21, 2008, which found that the U.S. was the leading recipient of R&D investment from abroad. So, other nations are outsourcing large amounts of R&D to Americans!

Clear evidence that what goes round does come around.

A New World Financial Order

2008-11-04T07:57:00.000-08:00

What is the "right" level of financial regulation?

The intensity of financial regulation has been in decline since the Reagan-Thatcher 1970s era of the currency deregulation, oil shock. and stagflation. But now, with the financial crisis having unmasked the general dereliction of duties on the part of regulators everywhere, that intensity is set to go up again. How far should it go?

I am going to outline some principles that should help define the "right" level of regulation. These are based on our novel concept of the levee in business.

This blog entry is an opener (the actual principles will follow in Part 2 of that entry).

Containing the Contagion on Wall Street

2008-09-24T08:49:00.000-07:00

As risk comes home to roost, devastation results. But we should be careful not to go overboard.

Those of us who haven't been living under a rock know the cataclysmic upheavals that have been shaking the world of finance of late. With cautious optimism, I declare that I had written on this very blog back in March 2007 that there were good grounds for apprehension as to the robustness of the world's financial markets.

But now that the death-defying daredevilry has gone awry, and the high-flying financial whizzes are feeling rather low these days, what is the right way to look to the future of the world's financial markets? Everybody (and their uncle) has their opinion. Read mine here.

China's Great Leap Forward on the Internet

2008-07-26T00:23:00.000-07:00

The Web goes Chinese, Part 2

China has been building a formidable presence on the World Wide Web for some time now, in just about every sense of the word. Now, we may be witnessing a tipping point being crossed: the IHT reported yesterday that China has overtaken the US as the country with the largest number of internet users.

And 253 million users is no mean number - it's more than the population of all but a handful of countries.

Maybe it's time for us to start learning Chinese.

The Peripatetic Professional

2008-07-25T23:19:00.000-07:00

Our notion of the professional career is set to change.

The vast majority of today's organizations rely primarily on fulltime employees to get their work done. However, there is a small fraction of professionals who work for organizations, but not as fulltime employees: they take on an assignment with specified deliverables for a company, complete that assignment, and move on to the next, usually with a different company.

Although people who work like like this are hardly unknown, we don't even have a name for someone who works in this mode. The closest names are probably 'consultant', 'contractor', or 'temp', but each of these words has many meanings and none of them really captures the essence of this type of professional.

Only a tiny fraction of professionals in any field today work in this manner. But they're the vanguard of a new brand of professionals who will emerge over the next few years, and who will change our notion of the professional career forever.

Why will this change happen? I've outlined the reasons, and painted my vision of how the professional career of the future will look, in this column.

We've come a long way from the notion of cradle-to-grave employment. Now, get ready to live purely from one assignment to the other.

A Distinctive Trend in the World of Technology

2008-06-07T23:46:00.000-07:00

Technology products are (at last) becoming more natural and intuitive

"The price of reliability is the pursuit of utmost simplicity. It is a price which the very rich find hard to pay" -- C.A.R. Hoare*

Sure enough, simplicity is really difficult to achieve in building technology products. Yet, there is ample reason to believe that there's a big move towards simplicity in the technology world. So, writing on this blog in January 2007, I had labeled simplicity as the defining technology trend of 2007.

The thought recently crossed my mind that I should evaluate how correct (or wrong) this prediction was. Some research I've done over the past couple of weeks to investigate whether there indeed was a move towards simplicity during the past year appears here. It is plain that not only did simplicity emerge as a distinctive technology trend in the past year, but that trend continues well into 2008. In fact, I make bold to say that simplicity and ease of use are set to be dominant themes in the technology world for the next few years.

That perhaps sounds heartening to Bjarne Stroustrup, the legendary inventor of the C++ language, who is known to have said, "There's an old story about the person who wished his computer were as easy to use as his telephone. That wish has come true, since I no longer know how to use my telephone".

The march towards simplicity has gathered steam. We can look forward to a steady stream of tech products that Dr. Stroustrup will find easier to use. Not to mention you and me. And the millions of novice technology users that the rapidly flattening world brings in each year.

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* in "The Emperor's Old Clothes", Turing Award lecture (1980).

Twitter: Strictly for the Twits?

2008-05-30T23:19:00.000-07:00

Twitter is being hailed as a revolutionary social networking technology. Can these claims hold hold water?

Twitter is yet another of the social networking techologies that seem to be proliferating with alarming regularity these days. For the incognoscenti, Twitter is essentially a technology that allows multicasting of SMS (Short Messaging Service) messages, i.e., sending SMSs to groups of people.

One can be forgiven if their first impression when told about this technology is one of complete inanity (as indeed, mine was !).

However, the technology does seem to have assembled a fairly formidable phalanx of support. Business Week seems to think it matters . It has been subjected to some fairly elaborate analysis. And (with some hyperbole), it has been hailed as the most important development on the web in 2008 .

The horse sense view would be that while the technology has been put to some serious uses, it still has a long way to go to prove its credentials as anything much more than a mechanism that supports leisure and keeping up with gossip. And oh, such a development is quite consistent with the need of a telecommunications industry that faces maturity, and is in search of new avenues for gleaning revenues.

And so, the impression of inanity appears set to persist for some time to come.

A Recce on the Recession

2008-05-26T06:31:00.001-07:00

Have fears of recession receded?

The past few months have seen great disquiet being expressed on just about every aspect of the economy. Pundits have averred that the US - and hence the world - economy is teetering on the brink of a recession. Learned observers have even prophesied the worst economic recession in many decades.

However, I have been getting a sneaking suspicion in the last couple of weeks that talk of recession has been flagging. To check whether this feeling is true, I decided to do some reconnaissance.

The New York Times opines today that "the most dire recession fears have started to abate". CNBC says that indicators show a weak economy, but no recession. Forbes assures us there is technically no recession so far (we would have felt more reassured if that article's title was not qualifed by the word 'technically' !). The White House, of course, continues to insist there is no recession*.

Google Trends shows searches for the word 'recession' peaking in late January 2008 and falling off since, with a decided downtrend since early April 2008. (Interestingly, the word 'subprime' too shows a declining trend since early April 2008).

So, have recession fears truly receded? It does appear so - but not so fast. The hallowed Wall Street Journal says there is likely to be a 'sort of' recession, but that the economy is going to hang in there, if barely. Warrent Buffet goes much further, saying the US economy is already in recession!

And then there are those who, somewhat stoically, say it doesn't really matter - that economic growth in most major world economies has slowed down so much that the person on the street is feeling the bite. And as long as that's true, the technicalities don't matter a great deal.

The horse sense view tends to agree.
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* but then, they also say there never was one, and never will be!

Every Customer, a King...

2008-03-07T00:40:00.000-08:00

Verily. But what of the Innovator's Dilemma?

It has widely come to be accepted that the 'closed', go-it-alone approach to innovation is no longer as potent as it used to be. The best way to unleash innovation is to unplug it, by dissolving conventional boundaries.

In particular, unplugged approaches that emphasize blurring barriers with customers, such as Co-creation and User-centric innovation, hold that innovating in close interaction with customers results in enhanced value for all participants.

At a cursory look, there appears to be something of a contradiction between the above and what Professor Clayton Christensen, arguably one of the greatest living thinkers on innovation, says. In his seminal 1997 book, The Innovator's Dilemma, Christensen has shown that leading companies routinely pass up the opportunity to bring radical, disruptive innovations to market, as these innovations often don't appeal to their current customers. At the time such disruptive products are introduced, their appeal is usually confined to downmarket customers - those whose needs, and pocket books, are too humble to merit the attentions of mighty corporations.

Analyzing the behavior of a phalanx of great companies including Xerox, Digital and Western Union when confronted by radical innovations, Christensen writes,

"Precisely because these firms listened to their customers, .. they lost their positions of leadership."
(The Innovator's Dilemma, Introduction, p. xv) * .

Digital Equipment Corporation (DEC), for example, strode the minicomputer industry like a colossus, but faltered when faced with the opportunity to make Personal Computers(PCs), which were a disruptive technology at the time. The reason was that the large corporations that DEC served had little use for the puny PC. Xerox was a behemoth in the market for large, sophisticated photocopiers, but failed to see the market for small tabletop copiers. Again the pattern was the same - tabletop copiers were not a product that held appeal for the enterprise market that Xerox had striven all its life to serve.

Indeed, recent Harvard Business School research findings say (with a bit of hyperbole, perhaps!) , "companies that do radical innovation do not listen to users" !

A Co-creator's Dilemma?

So, are we to conclude that truly disruptive innovations must be conceived and developed safely out of sight, where customers cannot see them? That co-creating with customers and users confines companies to improvements that are merely incremental, and keeps them from making innovations that are path-breaking, radical or disruptive?

In other words, is there a Co-creator's Dilemma which goes, "To create successful new products, you must get close to customers. However, if the product is truly path-breaking or disruptive, getting too close to customers may be a sure-fire way of overlooking the market for the product." ?

To find an answer, let's look at two of Christensen's prescriptions for how established companies should respond when presented with an opportunity to bring a disruptive innovation to market:

1. If the disruptive innovation is not going to be attractive to large customers, don't ditch the innovation. Instead, place the responsibility for its development with an entity whose customers will want to use it - a spinoff division, whose customers will (at least initially) be precisely those downmarket customers.

Of course, this essentially amounts to developing the product "safely out of sight" of some customers - those large customers who would not find the new product attractive.

2. Don't listen passively to customers, engage them in a process of mutual discovery. Recounting the example of how, in the 1960s, Honda discovered the market for smaller, off-the-road motorcycles in North America, Christensen says,

"Such discoveries often come from watching how people use products, not by listening to what they say" (p. 182)

Further, he says,

"neither manufacturers nor customers know how or why (new or disruptive) products will be used, and hence do not know what specific features of the product will or will not ultimately be valued. Building such markets entails a process of mutual discovery by customers and manufacturers" (p. 150/151)

So as long as the above two prescriptions are kept in mind, the Co-creator's Dilemma should be no hindrance for creating innovative products, whether incremental or radically disruptive !

Thus, the Co-Creator's Dilemma stands substantially diminished. However, while it has been shown to be not as intimidating or forbidding as it first appeared, it has perhaps not been entirely vanquished. But more about that later.

And so, in the annals of innovation, the customer (at least for the time being) firmly remains King. _________________________________________________________________________________________________________ * All page numbers refer to the paperback edition published by Harper Business Essentials, New York, 2003.

Discovering New, Untapped Markets

2008-02-21T01:55:00.000-08:00

What's common between Southwest Airlines, McDonalds and SUVs?!

The promise of new, untapped markets is something of a holy grail for every business. It conjures up dramatic growth opportunities from creating products that serve unfulfilled needs of existing customers, or attract new customers.

As will be their wont (!), management thinkers have devoted enormous energies toward creating frameworks and approaches that help practitioners innovate in opening up such untapped markets.

One leading body of management thought that has emerged in recent years, that aims to help companies fan out into hitherto undiscovered markets is Blue Ocean Strategy. Created by the famed duo of W. Chan Kim and Renee Mauborgne of INSEAD, France, this is a set of frameworks and techniques for opening up such new markets.

The horse sense view on this topic, however, is that it should be possible to keenly observe some innovative new products, and discern a few simple themes that led to the discovery of the previously untapped markets that those products were introduced to serve.

Such a 'simple theme that leads to the discovery of a previously untapped market' must, in my view, meet at least the following criteria:

- it should be shown to have led to truly successful products
- it should preferably have been used by innovating companies spanning a variety of industries, and
- it should be simple to for a innovation-hopeful company to implement.

One such theme that I have discerned, by observing a few innovative products that have emerged in various industries over the past several years, is what may be called innovating in the interstices. Simply put, it means that you target the interstices between existing, adjacent markets.

Hyatt was using similar thinking when it launched it's Hyatt Place brand of hotels in 2006, to blur the distinction between business and leisure hotels. The Premium Economy class of travel offered by many airlines, designed to cater to passengers whose preference (and affordability) lies in between regular economy and business class is another example.

And as I show in my post on the Infosys blog, such an approach has been used with great success by Southwest Airlines, McDonald's, the Indian auto major Tata Group, and other innovators.

And so, one may not need to look into the wild blue yonder for those blue oceans - they may be much closer, in the white spaces between familiar, adjacent markets!

Unleashing Innovation, the Unplugged Way

2008-02-08T03:05:00.000-08:00

In the lexicon of modern-day business, innovation and isolation are firm opposites

A strong lesson that efforts at innovation have taught in recent years is, don't go it alone. In fact, innovation is best done by opening out, inviting fresh perspectives, admitting new participants, and allowing new combinations.

Most of the major new approaches to innovation that have emerged over the past few years - Open Innovation, "Crowdsourcing", Co-creation, User-centric Innovation - embody this more-the-merrier feature. The development of the fabled iPod, Proctor and Gamble's Connect-and-Develop initiative, IBM' s innovation ecosystem and Intel's lablets and corporate venturing approach, Innocentive, the Collaborative drug discovery project , IDEO's design philosophy, IKEA's fabulously successful approach to furniture design, the creation of the Linux operating system, all exemplify one or other of the above approaches in action.

Because these approaches to innovation - Open Innovation, "Crowdsourcing", Co-creation, User-centric Innovation - have a similar principle underlying them, I thought it's a good idea to collect them under one umbrella term - Unplugged Innovation. To better understand why such a new term is needed, and how companies can thrive in this brave new world of unplugged innovation, see my post on the Infosys blog.

This unplugged approach is one central theme that has emerged in innovation over the past few years. There are two more such themes, which I will elaborate on over the next few weeks on that blog.

And so, the lone innovator is firmly a thing of the past. If you want to unleash innovation, unplug it!

Extreme Open Innovation

2007-12-21T02:59:00.000-08:00

The open approach to drug discovery gets a healthy fillip. Big pharma should pay attention.

Humankind's continued well-being depends strongly on creating new life-saving drugs. However, the ability of the big pharma companies to innovate new drugs has been showing signs of waning, resulting in drug pipelines that are not exactly brimming.

'Open' Research & Development for discovering new drugs has been mooted for some time as a cure for ailing drug pipelines. One promising instance of such open-source drug discovery is the Collaborative Drug Discovery project backed by, among others, eBay founder Pierre Omidyar's Omidyar Network.

Now comes an initiative that has the potential to take the open drug discovery phenomenon to an altogether new level. The Council for Scientific and Industrial Research (CSIR), the apex research body of the Indian government, is planning to harness the brains of drug researchers across the world in solving drug development problems. Problems identified by CSIR will be made publicly available on a website, and any researcher will be able to suggest solutions and receive cash awards.

This initiative is novel, if not necessarily in concept, in sheer scale. This is the first time an open drug discovery initiative is receiving the backing of a government, and the incentives involved can be expected to be suitably large. It is also likely to have the clout that goes with government backing. It carries with it the promise of access to gigantic emerging markets. It is audacious, having the potential to fundamentally alter the way the multi-billion dollar pharma industry looks at innovation.

In short, it's open innovation on a massive scale. That's why, at some risk of sounding hyperbolic, I am terming this initiative as Extreme Open Innovation.

While the initiative is highly promising, and it is heartening to see such a step being taken by a government, it is too early to think of this approach as a panacea for all the ills of new drug discovery. Any new drug designs resulting from this program will be in the public domain, with scant protection for the creator. This runs counter to a basic precept on which much drug research has been based: the exclusive ability to monetize a new drug. For this reason, big pharma can be expected to, at least initially, ignore the initiative.

A lot will depend on how much backing the Indian government provides, in terms of financial investment and program management, and in terms of using its persuasive skills to convince big pharma to participate.

There are risks associated with the success of such an initiative too. Big pharma may be unable to compete in pricing with a drug discovered thru the open route. Thus, it is possible that the moment a disease is listed on the open drug discovery database, big pharma will abandon work on finding cures for that disease.

Open Innovation in Action
The generic principle on which such open drug discovery is based is that of the 'Open innovation' approach or its close cousin, crowdsourcing . Open innovation has in general come to be accepted widely, with Innocentive and Proctor and Gamble's Connect and Develop approach being two of the best known initiatives.

And the open approach to innovation clearly appears to have gained traction at the cost of internal R&D. The Economist, quoting IBM's "Global CEO study 2006", says that internal R&D was reported as a significant source of innovative ideas by less than 20% of companies. It ranked a low eighth in the list of major sources of innovative ideas, and only above academia, which brought up the rear.

If the CSIR's Open drug discovery initiative succeeds, it can greatly reduce the costs of new drug development*. It will also provide a stellar example of how the internet and social computing technologies can help innovation thrive, by removing barriers to knowledge flow. It can thus represent a major leap forward for open innovation, and for improving the human condition.

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* Many observers believe that big pharma's cost of drug development is too high because of inefficiencies, and because some companies may exaggerate drug development costs in order to price drugs higher. If this is true, then the lack of transparency in drug R&D costs may be a good example of a levee in business that big pharma is sheltering behind - a levee which open drug discovery may be capable of shattering.

A Somewhat Surprising Price Rise

2007-12-13T00:40:00.000-08:00

The road to alternative energy hits an unexpected bump

China's inflation has rocketed to a 11-year high, primarily on the back of rising food prices, which have risen a whopping 18.2% over the year. Britain is seeing the highest gain in food prices since 1993 . And in the US, according to Labor Department statistics, food costs are on track for an annual gain of 7.5%, the biggest since 1980.

The Economist attributes two reasons for the unexpected rise in the price of food - rising incomes in the world's developing countries, and subsidies on ethanol fuels. The first - rising incomes in the developing world - contributes to food price rise in two ways. The obvious way is that, as more people come out of poverty, they increase the amount of food they eat, thus raising demand for food in general. Somewhat less obviously, people also shift to a diet with more meat content, which multiplies the demand for foodgrain (it takes several calories of grain to make one calorie of meat).

Thus, while the first reason for this "agflation" is simply the result of a lifestyle choice being exercised by millions of people, the second reason stems from a policy choice by the US government - to subsidize ethanol-based fuels. This is causing causing US farmers to divert more farmland to growing the corn that goes into making ethanol, thus reducing the land under cultivation for foodgrain. The natural effect of this is to raise foodgrain prices. It is thus being argued that such subsidies effectively translate into a tax on the poor.

Of course, not everybody is buying the ethanol-subsidy-as-a-culprit theory. A recent study based on 20 years of price data shows that corn prices have minimal impact on the U.S. Consumer Price Index for food.

Overall, it is fairly clear that a strong link has emerged between cereal and energy prices - both because transporting cereals takes energy, and because rising energy prices mean more land being diverted to growing grain for ethanol production, thus reducing the land under foodgrain cultivation.

All this goes to show that the effort to move away from conventional fossil fuels and toward alternative energy sources is more complex than it appears. All the more support for our approach toward foreseeing the potential of an emerging technology (by our definition, an alternative energy source counts as an emerging technology), which takes a wide variety of factors into consideration.

The Levee in Business: What do Expedia, Wikipedia, Skype and Wal-Mart know that you don't?

2007-10-22T05:33:00.000-07:00

A novel concept that has ramifications for strengthening a business model, as well as for innovating new business models

Digital Equipment Corporation (DEC) was a hallowed name in the technology industry during the 1960s and ’70s. However, faced with open technologies from IBM, Microsoft, DEC went into a decline from which it never recovered.

In the mid-1990s, Dell Computer introduced its direct sales, build-to-order model for selling PCs, bypassing resellers, retailers, and other industry intermediaries with resounding success. Within a few years, Dell grew into a mighty, multibillion dollar company.

Can you tell what's the common phenomenon underlying these two apparently diverse sequences of events? It is the levee in business - the abstract and often subtle “wall” that inhibits the free play of market forces, and holds environmental pressures from being transmitted to a business.

As the two examples hint, the levee in business is two-sided. Left unattended, the levee can be a disruptor to business performance. However there’s another, more exciting, reason to learn
about levees: used creatively, the levee can also serve as a basis for innovation. We’ve found that significant business-model innovation is often driven by would-be marketplace entrants or
audacious challengers breaking down the levees shielding entrenched players.

Although the levee in business is a new abstraction being defined by us, it is clear that Expedia, Travelocity, Wikipedia, Skype, Zopa, Wal-Mart and Dell are just a few of the companies that have innovated by using the principles underlying this concept. For details, read our article in Business Strategy Review (needs subscription*), or in Consulting magazine.

Levees of the nature we describe currently receive very little focus in organizational discourse. That needs to change.
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* Or drop me a line and I will check if it is feasible to get you access to this article.

The Technology Foresight Deficit, Revisited

2007-09-12T00:47:00.000-07:00

The importance of collaboration, and towards a more energetic future

As I've written earlier, I have been working on understanding the factors that drive the emergence of emerging technologies, and trying to create a methodology for gauging the potential of an emerging technology. Such a methodology should go a long way towards conquering humankind's technology foresight deficit.

One insight we have recently got* indicates the importance of collaboration in bringing new technologies to market. Most modern technologies are far too complex to be brought to a stage where they are ready for business use entirely on the strength of one company, however formidable that company's innovative prowess may be. It is when the innovating company collaborates judiciously with other companies that an emerging technology has the greatest chance of seeing the light of day**. Such collaboration may be "horizontal" (between players in the same segment of the industry value chain), or "vertical"(between players in different segments of the value chain). Most standards, such as 3G for mobile telecommunications or XBRL***, represent what I call horizontal collaboration. Organizations often exist to facilitate such collaboration - the World Wide Web consortium (W3C), or the Object Management Group (OMG) are examples. Equally important, although less structured and typically more difficult to achieve, is vertical collaboration. Companies that master both forms of collaboration will be the most successful innovators in the coming years.

Technology's Future in Energy, and Vice-versa

The very essence of technology is that it usually enables humans to achieve a task with less energy. But every technology of any note also consumes energy. And since having technology at hand also means that people will undertake lots more tasks than they otherwise would have, the net effect of using technology is an overall increase in the use of energy. This is also borne out by the monotonic increase in humankind's use of energy over the millenia, which has coincided with the increasing use of technology.

Ensuring sufficient generation of energy for the world while reducing dependence on fossil fuels is thus high on the agenda. Studying a plethora of non-conventional energy sources - solar, wind, geothermal, wave and tidal, our assessment**** showed that the future of solar energy is perhaps brightest, while wind energy is sailing along smoothly. Perhaps what's most heartening is that the combined prospects for the various non-conventional sources add up to a very healthy figure. And, at a time when the prospects for conventional energy sources over the next few decades appear somewhat cloudy, that finding augurs well for the future of technology, energy and society.
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* This insight was largely a consequence of work done by Chantrelle Nielsen, MBA candidate at MIT Sloan School who interned with me as part of our InStep program.

** These findings are consistent with Henry Chesbrough's widely accepted "Open Innovation" paradigm, which holds that companies increasingly need to look outside their own walls for both ideas to seed innovation, as well as routes to bring that innovation to market.

*** eXtensible Business Reporting Language, a XML standard for the electronic communication of business and financial data.

**** This work was done with intern Andres Pacheco, who is working towards his BS at Swarthmore College.

iPhone, Therefore i Am (...i Think!)

2007-09-08T00:53:00.000-07:00

In which we ponder what appears to be an existential dilemma thrown up by Apple's baffling moves...

There can scarcely be any doubt that Apple's iPhone is among the most celebrated technology products in history. This admittedly ingenious little device can lay claim to several superlatives - coolest (great interface), most keenly awaited(announcing it 6 months ahead was a brilliant ploy), most innovatively marketed (they leveraged technology to the fullest, and let the media and the user community do most of the marketing - viral marketing at its best).

And sure enough, its post launch sales appeared healthy. Which is why Apple's latest move to cut the iPhone's price by a whopping $200 are puzzling at best. Equally baffling is the withdrawal of the lower priced 4GB phone from the market.

Although the price cut has been partially rolled back, and Steve Jobs has apologized to miffed iPhone owners, I must say that I find these moves utterly confounding. As a general rule, it is bad strategy to cut the price of any product, for several reasons: A price cut may be interpreted as signaling financial distress or desperation on the manufacturer's part. It can lay a manufacturer open to accusations of opportunism. It can arouse suspicions that the manufacturer's own faith in the product has been undermined, perhaps due to defects that have been discovered. It may cause unease among buyers, due to a feeling that the manufacturer knows something about impending market or regulatory moves that may undermine sales of the product. Or it may signal an overly aggressive posture to competitors, provoking a possible price war. This is not to say that a company can never cut the price of its products, but that such a cut should be effected only after really, really deep thought.

But the most important reason not to reduce prices is that customers who have already bought the product are likely to feel cheated. And it is poor strategy indeed to give an impression of betraying your customers' trust, however tenuous or unfounded that impression may be.

So what has prompted this apparently confused move from a company otherwise known for its razor-sharp strategy and very keen sense of what its customers want?

Jobs' explanation that this is how technology markets work is not entirely convincing. Even in the high-tech space, manufacturers do not cut prices of a product while it is still top-of-the-line - if they must, they wait at least until after it has been superseded by a more advanced product. And when that product has been in the market scarcely for 3 months, having prospective customers wait for a heavily hyped six months, a price cut looks even sillier.

The widely pilloried move, followed by the partial rollback and apology clearly show that the company has faltered. Of course, the apology does show that Apple's heart is in the right place, but then it is a half-hearted apology at best, tempered with admonitons that this is a risk that customers must expect when they buy technology products. Can it be that the company has lost its fabled touch? Is the appearance of an existential waffle a la Descartes justified, or is that reading too much into it? We can expect lots of analysis, both scholarly and otherwise, that tries to get at the bottom of the move.

For the moment, the horse sense view would appear to be that iPhone sales momentum is slowing as the initial hype and heady expectations ebb. And Apple is worried the iPhone will be a forgotten product by the time the all-important holiday season rolls around. And therein lies one lesson that we can most certainly take away from this development - that in the technology world, hype dies early, and yesterday's star quickly becomes today's also-ran. As the legendary Intel pioneer Andrew Grove said, it's a good idea to be paranoid.

An OPEC Less Opaque

2007-08-30T22:44:00.000-07:00

Do oil prices always have to be a matter of surprise?

The price of oil has always been a subject of great debate, analysis, and not least, fascination. And not surprisingly so, given the importance of that simple little number to the world economy. However, oil prices seem to have a remarkable propensity to confound the bravest of predictions. Real oil Prices began an upturn in late 2002, and trebled by mid-2005*, leading to predictions of $100 oil over the next few years. While the nightmare $100-a-barrel predictions have not materialized - and don't appear very likely to do so anytime soon** - the fact remains that a price rise that appeared to be a temporary spike does seem to have led to a more or less permanent plateau.

What's more, as the US DoE's graph shows, the behavior of oil prices over the past 30-some years can hardly be described as monotonic. And each time it lurched up or down, it is not difficult to imagine the wide-ranging impact on the fortunes of nations, governments, industries and individuals.

The benefits of steady oil are thus not far to seek. But can the price of oil be steadied, or at least made to move in more predictable ways over the short- as well as long-term?

Clearly, this is an immensely difficult question to answer. Many factors are at work. The prices of even the staidest of commodities are volatile at the best of times. And oil can hardly be described as a staid commodity. It's price is affected by a heady mix of geopolitical considerations, speculation, regulatory moves, and so forth. Also, as the DoE graph shows, the price trajectory has been punctuated by various events which caused the price to react sharply, most of which were quite unpredictable at the time. And against this backdrop of formidable factors, it appears there isn't really much any single entity, such as one government or one institution, can do to steady the price.

More transparency
But make no mistake- there is an awful lot that one particular organization can do - if it has the will. This organization is, not surprisingly, the Organization of Petroleum Exporting Countries (OPEC). Headquartered in a deceptively unassuming building in central Vienna, OPEC still wields enormous clout in deciding the world's energy future. Of course, it's record of influencing the oil price since the oil price shock has been somewhat less than stellar, particularly after Saudi Arabia abandoned the swing producer role in 1986.

The world oil industry is beset by lack of good data (and probably some obfuscation) on production figures - actual output as well as capacity. Similarly, there is rarely much clarity on oil reserves. OPEC can make a big difference by evolving better mechanisms to govern output and reporting.

This sentiment is not exactly new - a US Joint Economic Committee press release dated 2005 says, "Much more transparency in OPEC oil production is needed, as noted by the International Energy Agency and others".

Price gyrations are clearly not good for anybody. And OPEC suffers almost as much from high prices as consumers do. High prices can severely crimp demand, particularly if measures such as gasoline taxes imposed to control the environmental impact of oil use gain wide traction. Consistently high prices can also encourage research into technologies to produce alternative energy*** (although these are not without concerns of their own.). And so OPEC will do itself a favor by becoming more transparent. And it will greatly help the world economy avoid getting onto a slippery slope.

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* the US Dept. of Energy has a nice graph that traces the prices of oil (nominal as well as real) over the period 1970-2006.

** interestingly, $100 oil predictions are still going strong.

*** More on alternative energy technologies in my next post, where I'll also be talking about how we applied our methodology for foreseeing emerging technologies to the problem of guaging the potential of technologies that produce energy from solar, wind and other sources.

What REALLY Works..umm..well, sort of..!

2007-08-25T00:37:00.000-07:00

Is there a secret sauce for corporate success?

The Halo Effect is a cognitive bias whereby the perception of a particular trait (for example, of an individual) is influenced by a general impression (of that individual). This effect was first postulated by Edward L. Thorndike, an American psychologist who conducted research into how World War I soldiers were appraised by their superiors. He found high cross-correlation between all positive and all negative traits - in plainspeak, that means that soldiers who were found to be good on one or two traits were rated as good on all other traits as well, while those who were seen to be bad on one or two traits were rated poorly on all other traits as well.

Lest we think that this is an affliction confined to senior World War I army officers, it isn't. Pretty much all human beings suffer from this bias - apparently it is a mechanism used by the human brain to manage the complexity of the world. This, for example, is why celebrity endorsement of products works, even when it is fairly apparent that the celebrity has no credentials - or credibility - to endorse those products.

Most of us also seem to intuitively realize the existence of this effect - for example, this is why people go to extraordinary lengths to put on their best behavior in the presence of somebody in authority.

Now, a book called The Halo Effect ... and the Eight Other Business Delusions that Deceive Managers, published in February 2007 by Free Press, sets out show how this effect may color our perceptions of company performance. At first glance, this is the book the business world was waiting for, and didn't know it. It's a good, down-to-earth look at the various studies, scholarly and otherwise, that have claimed over the years to uncover the secret sauce that drives great companies. This is a book full of solid horse sense - the most refreshing book in years in a genre notorious for pompous claims and buzzphrases.

It dedicates itself to debunking simplistic "theories" that purport to answer the core question of what really determines corporate performance. The core argument of the Halo Effect is that when a company performs well, we shower glowing ratings on every one of it's management traits such as leadership, culture, strategy, execution, et al. When the company performs poorly, we promptly buckle over to the other extreme, demonizing the very same leadership, culture, etc.*!

Along the way, the book unveils eight other "delusions" that frequently afflict attempts to answer this question. In buttressing its arguments, the book quotes from authorities as varied as George Bernard Shaw and the legendary Nobel Laureate Richard Feynman.

The book comes with cast-iron credentials - the author is Prof. Phil Rozenzweig, who is a PhD from the Wharton School at the University of Pennsylvania, and has taught at Harvard Business School and IMD, Switzerland. His candor is incredibly refreshing, and the fact that most of the authorities on this subject that he takes on are people of his "own" - business school professors - shows admirable boldness.

The other delusions include the old statistician's chestnut - mistaking correlation for causality. Another one relates to the quest for single, over-arching explanations for good performance where in reality there may be multiple factors at work. Yet another delusion deals with the fact that company performance is often seen in absolute terms (reduction of inventory costs, for example) while it should really be seen in relative terms (for example, market share, or change in inventory costs relative to those of the competition).

I thought one delusion, the 'delusion of rigorous research' is rather inaptly named. It holds that it doesn't matter how rigorous our research methodology is if it uses data that isn't of good quality. True enough, but this delusion would probablybe better named so as to direct the focus on the poor data quality.

Personally, perhaps the best takeaway from this book was the exhortation that one should not select a sample for study based on the dependent variable - for example, if you want to study if a new technque for teaching mathematics to children works, you should study how kids who were taught using that technique fared, but you should also look at children who weren't taught that technique! **

One criticism that may be leveled at the book is that it is sometimes too quick to assume that the data used by various studies were "contaminated" by halos; it seems to me that this is too facile, and perhaps unfair, a conclusion. We should probably credit the authors of those studies, the references they consulted, and the subjects they interviewed with a greater degree of discretion and diligence than that. Another thing I found myself wishing the author would refrain from is the extent to which he bases evidence for the delusions on news reports in the business press, such as BusinessWeek, Fortune and The Wall Street Journal. These are written by reporters under stifling deadlines, often under pressure to sensationalize the mundane - a fact that does not escape most discerning readers. There can be a smattering of these, but the author would probably have done better to focus his considerable energies on well-funded studies done over a long period of time, with purport of scholarly rigor, and papers and books*** based on such studies. The readers of such reports, papers and books are typically asked to suspend common sense and prior experience, and submit to scholarly authority derived from apparent academic rigor, and it is these for which the greatest disapprobation should be reserved.

So, what does work, according to the author? Well, he concludes, somewhat disappointingly, that it's the right strategic choice, and good execution!

But this is not to take away from the otherwise excellent content of the book. It's job is not to give us formulas. It's purport is to caution us that business performance is far more complex, and far less amenable to simplistic analysis than we tend to think, and it achieves that goal with admirable panache!
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* I have referred to this "binary" thinking as the Extreme Tendency elsewhere, albeit in a somewhat different context - that of foreseeing the prospects of emerging technologies!

** Later in the book Rozenzweig shows that even observing this precept doesn't help much in uncovering what drives corporate success, but it's a very important principle to keep in mind nonetheless.

*** That, without openly claiming anything of the kind, actually intend to expand the fame of their authors as management Gurus, not to say anything of their pockets!