Leapfrog – Page 4 – artdiamondblog.com

“Bet the Company”

When entrepreneurs, or innovative companies, take large risks, and succeed, we sometimes begrudge them their success. But we should remember that sometimes they took great risks, and that they could have lost everything if they had lost the ‘bets’ they made.

One of the most famous examples of ‘betting the company’ is when Tom Watson, Jr. of IBM ‘bet the company’ on the development of the expensive, but pathbreaking, system 360.

This episode is mentioned many places. One that I ran across recently is in Gerstner’s memoir of his own time at IBM. The following lines appear in Gerstner’s brief summary of some important periods in IBM’s earlier history:

Much has been written about this period and how Tom "bet the company" on a revolutionary new product line called the System/360—the original name of IBM’s wildly successful mainframe family.

To grasp what System/360 did for IBM and its effect on the computing landscape, one needs to look no further than Microsoft, its Windows operating system, and the PC revolution. System/360 was the Windows of its era—an era that IBM led for nearly three decades. (p. 114)

The reference to the Gerstner book, is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

Gerstner Mentions “Leapfrog Competition”

After hearing a "leapfrog competition" mention in Gerstner’s book, I did a phrase search in Amazon. Apparently he uses the phrase once, as follows:

(p. 159) This doesn’t mean it wasn’t a good transaction for AT&T. It allowed AT&T to leapfrog its competitors. But for IBM it was a strategic coup.

The book is:

Gerstner, Louis V., Jr. Who Says Elephants Can’t Dance? Leading a Great Enterprise through Dramatic Change. New York: HarperCollins, 2002.

“Man in White Suit” Science Fiction, Now Nearly Science Fact

PART of what sold James Tirey on a change in attire was the coffee spilled on his legs during a rough flight. ”It stayed sticky until it dried,” he said, ”about mid-Atlantic.”

To avoid such incidents, he bought a new pair of pants with an invisible, high-tech surface suited to the exigencies of business travel. These pants look and feel like most others, but the ingenious finish on the fabric is different: it is made of tiny, nanosized particles that repel water, ketchup, honey, blood, vinaigrette and a thousand other potential indignities. With such a surface, he said, ”if coffee is spilled on you, it just beads up” or runs off. The pants can be wiped with a paper napkin — even the skimpy cocktail kind handed out on airplanes — leaving the material dry and unscathed.

Mr. Tirey, who lives in northern Virginia, bought his pants, called the Steel Pant, at Beyond, a Eugene, Ore., company that makes and sells outerwear for men and women at BeyondFleece.com. The material is manufactured by the Swiss company Schoeller Textil, which makes both the weave and the nanofinish, called NanoSphere. On the Beyond Web site, the pants cost $119, the nanocoating an additional $15. ”It was definitely worth the money,” Mr. Tirey said of the purchase.

For the full story, see:

ANNE EISENBERG. "NOVELTIES; The Chemist’s Find: A Way to Shrug Off Spills." The New York Times , Section 3(Sun., August 27, 2006): 5.

R&D Stats Better; But Still Omit a Lot of Innovation

GDPgrowthWithR&Dgraph.gif Source of graphic: online version of WSJ article cited below.

Note well Romer’s caveat below that, although we may be measuring better, we are still not measuring Schumpeterian innovations (such as the Wal-Mart innovations that are vastly increasing the efficiency of retailing).

That research and development makes an important contribution to U.S. economic growth has long been obvious. But in an important advance, the nation’s economic scorekeepers declared they can now measure that contribution and found that it is increasing.

. . .

Since the 1950s, economists have explained economic output as the result of measurable inputs. Any increase in output that can’t be explained by capital and labor is called "multifactor productivity" or "the Solow residual," after Robert Solow, the Nobel Prize-winning economist considered the father of modern growth theory.

From 1959 to 2002, this factor accounted for about 20% of U.S. growth. From 1995 to 2002, when productivity growth accelerated sharply, that grew to about 33%. Accounting for R&D would explain about one-fifth, by some measures, of the productivity mystery. It suggests companies have been investing more than the official data had previously shown — a good omen for future economic growth. "The slump in investment is not as drastic as people thought before they saw these figures," says Dale Jorgenson, professor of economics at Harvard University.

Mr. Jorgenson noted a lot of the multifactor productivity growth remains unexplained. "The great mystery of growth . . . is not eliminated."

Paul Romer, an economics professor at Stanford Business School, said the better the measurements of R&D become, the more economists and policy makers will realize other factors may be more important. "If you look at why we had rapid productivity growth in big-box retailing, there were lots of intangibles and ideas that . . . don’t get recorded as R&D."

For the full story, see:

GREG IP and MARK WHITEHOUSE. "Why Economists Track Firms’ R&D; Data on Knowledge Creation Point to an Increasing Role In Domestic Product Growth." Wall Street Journal (Fri., September 29, 2006): A2.

(Note: The slightly different online version of the title is: "Why Economists Track Firms’ R&D; Data on Knowledge Creation Point to an Increasing Role In Domestic Product Growth.")

(Note: ellipses in Jorgenson and Romer quotes, in original; ellipsis between paragraphs, added.)

Sprint to Risk Billions on New Infrastructure

Source of graphic: online version of the WSJ article cited below.

If Sprint bets on WiFi, they’re betting with their money; if the government bets on WiFi, they’re betting with your money. If Sprint succeeds, thereby benefiting the consumer, at no risk to the consumer, the consumer should not object to their earning huge profits.

Note also, that this is a plausble candidate for a firm trying to follow Clayton Christensen’s advice to try to disrupt itself. (And see the comment at the end, for someone who hasn’t read Christensen, or doesn’t believe what he has read.)

Analysts say building a nationwide WiMax network could cost Sprint between $1 billion and $4 billion, a hefty sum for a company that is already struggling to meet Wall Street’s expectations. Sprint said it expects to invest $1 billion on the project in 2007 and between $1.5 billion and $2 billion in 2008.

Sprint’s decision carries considerable risks: Investors have hammered telecom companies that have made large capital investments in new technologies, banking on future markets to emerge. For example, among other things, Verizon Communications Inc.’s stock has been under fire as the company is rolling out a costly new fiber optic network that it says will position the company to deliver a bundled TV, Internet, and phone service. Also, WiMax technology is still untested on a large scale.

Sprint is making a huge bet that consumer demand for wireless Internet access and services such as cellphone downloads of music and video will continue to grow in the coming years. Consumers already can get access to wireless Internet service at Wi-Fi "hotspots" in airports and coffee shops, and some cities, like Anaheim, Calif., are blanketing their terrain with Wi-Fi connections.

. . .

. . . , some analysts and industry experts question why the company is gearing up for such a major capital investment when it is already even or ahead the other top U.S. carriers, Verizon and Cingular Wireless, when it comes to data services. "Why compete against yourself? It doesn’t make a lot of sense at this point," said Mike Thelander, principal analyst at Signals Research Group who predicted several weeks ago that Sprint would choose WiMax.

For the full story, see:

AMOL SHARMA and DON CLARK. "Sprint Bets on New Wireless ‘WiMax’." Wall Street Journal (Tues., August 8, 2006): B1-B2.

(Note: the above passages are from the online version, which was later, and less tentative about Sprint’s intentions, than the print version.)

(Note: ellipses added.)

Markets, Not Courts, Should Decide Intel Market Share

Intel executives, coming up on a pre-trial conference in a case that could decide their company’s fate, should be looking with envy and admiration at Tiger Woods, and wondering how to make their business more like his.

If golf followed the same path as other businesses, Tiger could expect to face a lawsuit contending that his dominance of professional golf is based on unfair competition. And in fact, a few years back Sergio Garcia whined that Tiger got better practice times, favorable treatment around the course, more protection against distracting fans — little things that could, Mr. Garcia intimated, explain Tiger’s edge. Sportswriters responded swiftly, deriding Mr. Garcia for looking to blame others for his being outcompeted. They understood that sports contests belong on the field, not in the media or the courts.

The same should be true of business. Market-based economies thrive on competition. The competitive economy doesn’t yield an infinite number of equally successful firms producing indistinguishable products, but lets winners and losers emerge from marketplace competition. The (inevitably) temporary dominance of one product or one firm spurs others to compete harder. Today, however, many businesses — especially American ones — find it easier to restrain a dominant competitor through the courts than to beat it in the market.

Take the case of Advanced Micro Devices and Intel, the dominant chipmaker for PCs and servers. AMD for years played the role of Phil Mickelson to Intel Corporation’s Tiger Woods — the talented rival who keeps coming up short in head-to-head competition. Last year, it decided to model Mr. Garcia rather than Mr. Mickelson, filing an antitrust action against Intel, charging it with a variety of unlawful actions.

. . .

AMD finds fault in Intel’s continued market dominance: Because Intel has had 80% or more of the x86 chip processor market for many years it must be doing something illegal to keep rivals out. Yet, George Stigler, among others, long ago debunked the significance of market share as a measure of competition. Duopoly markets, like the market for large commercial aircraft, can be fiercely competitive. Ask anyone working at Boeing or Airbus.

Moreover, markets can change rapidly, especially high-tech markets, often in ways unanticipated by antitrust suits. Witness the changes in computing that caused the government’s antitrust case against IBM to implode.

For the full commentary, see:

RON CASS. "RULE OF LAW; Tigers by the Tail." Wall Street Journal (Sat., September 23, 2006): A7.

“Crystal Fire” Gives Insights on Birth of the Transistor

Source of book image: http://www.etedeschi.ndirect.co.uk/homecompbiblio.htm

Crystal Fire is a well-written book which highlights many important aspects of the birth of computers. Not a perfect book—I could have done with a few less details about personal information, like who liked to play bridge and poker, and whose mother was a frustrated artist, and the like.

On the good side, they note how transistors were originally designed to replace vacuum tubes. The eventual main applications, as memory and processor chips in computers, only came later. (Another application of Fubini’s Law.)

They have a nice discussion of how American science was applied, versus the pure theory of the Germans. (E.g., to the Germans, some key phenomena leading to transistors, were dismissed as "dirt effects" (pp. 74 & 78).) The whole episode is a good example of the claim (see Terence Kealey) that very good science can come out of ‘industrial’ labs.

They also have a good example of serendipity, in the discussion of the strange chunk of silicon with unusual conductivity properties (circa p. 95). Reading this episode, it occurred to me that one key enabler of serendipitous discoveries is a scientist or engineer who is carrying around a problem, to which the serendipitous discovery is a solution. Buddhists need not apply—to carry around problems, you need to be dissatisfied–a milder version of what Tom Peters describes as ‘innovation coming from pissed-off people’ (see his Re-Imagine!)

Citation to the book:

Riordan, Michael, and Lillian Hoddeson. Crystal Fire: The Birth of the Information Age, Sloan Technology Series: W. W. Norton & Company, 1997.

Life Is Better, But Could Be Better Still

November 9, 1952 NYT ad announcing the introduction of the snowblower. Source of image: online version of the NYT article cited below.

(p. C1) When the first snow falls on the North Shore of Chicago this winter, Robert Gordon will take his Toro snow blower out of the garage and think about how lucky he is not to be using a shovel. Mr. Gordon is 66 years old and evidently quite healthy, but his doctor has told him that he should never clear his driveway with his own hands. “People can die from shoveling snow,” Mr. Gordon said. “I bet a lot of lives have been saved by snow blowers.”

If so, most of them have been saved in the last few decades. A Canadian teenager named Arthur Sicard came up with the idea for the snow blower in the late 1800’s, while watching the blades on a piece of farm equipment, but he didn’t sell any until 1927. For the next 30 years or so, snow blowers were hulking machines typically bought by cities and schools. Only recently have they become a suburban staple.

Yet the benefits of the snow blower, namely more free time and less health risk, are largely missing from the government’s attempts to determine Americans’ economic well-being. The same goes for dozens of other inventions, be they air-conditioners, cellphones or medical devices. The reasons are a little technical — they involve the measurement of inflation — but they’re important to understand, because the implications are so large.

. . .

(p. C10) In the early 1950’s, Toro began selling mass-market snow blowers, which weighed up to 500 pounds and cost at least $150. As far as the Bureau of the Labor Statistics was concerned, however, snow blowers did not exist until 1978. That was the year when the machines began to be counted in the Consumer Price Index, the source of the official inflation rate. By then, the cheapest model sold for about $100.

In practical terms, this was an enormous price decline compared with the 1950’s, because incomes had risen enormously over this period. Yet the price index completely missed it and, by doing so, overstated inflation. It counted the rising cost of cars and groceries but not the falling cost of snow blowers.

. . .

Mr. Gordon, besides being a fan of snow blowers, also happens to be one of the country’s leading macroeconomists. A decade ago he served on a government-appointed group known as the Boskin Commission. It argued, as Mr. Gordon still does, that the government exaggerated inflation by more than one percentage point every year.

. . .

. . . Mr. Gordon’s adjustments show that men actually got a 27 percent raise in this period and women 65 percent. The gains are not as big as those of the 1950’s and 60’s, but they do sound far more realistic than the official numbers. Think about it: we live longer than people did in the 1970’s, we’re healthier while alive, we graduate from college in much greater numbers, we’re surrounded by new gadgets and we live in bigger houses. Is it really plausible, as some Democrats claim, that the middle class has made only marginal progress?

For the full commentary, see:

DAVID LEONHARDT. "Economix; Life Is Better; It Isn’t Better. Which Is It?" The New York Times (Weds., September 20, 2006): C1 & C10.

(Note: ellipsis added.)

Source of graphic: online version of the NYT article cited above.

Canon Prospers By Ignoring the ‘First Mover Advantage’

Canon’s new HV10 high definition camcorder. Source of image: the NYT article cited below.

In the dot-com era, many believed that in each niche, the future belonged to the company that got-in, and got-big, first. Sometimes this was called the ‘first mover advantage.’ There are many counter-examples. Here is one more:

(p. C1) Next month, Canon will release the world’s smallest and least expensive high-definition tape camcorder, a one-handable beauty called the HV10.

. . .

This image-quality business, as it turns out, is the new Canon’s specialty. Talk about being blown away the first time you play back your recordings — let’s hope you have a sturdy couch.

Several advances are responsible for the brilliant picture quality. First, Canon has paid extra attention to two of the most important aspects of HD recording: focus and stability. Because the high-def picture is so sharp and so wide, moments of blur-(p. C11)riness or hand-held jitters are far more noticeable and disturbing than in regular video.

So the front of the HV10 bears a special external sensor that, when you change your aim, handles the bulk of the refocusing extremely rapidly. A standard through-the-lens focusing system does the fine tuning after that. Together, these two mechanisms nearly eliminate the awkward moment of blurry focus-hunting that mars other camcorders’ output.

. . .

. . . , by entering the high-def camcorder market a year and a half after its rivals, Canon has played the same conservative waiting game it once used with digital cameras and camcorders. Its goal, of course, is to watch and learn as the pioneers get all the arrows in their backs.

If the HV10 is any indication, the company is off to a very good start.

For the full review, see:

DAVID POGUE. "A Head Start On the Future Of High-Def." The New York Times (Thurs., August 10, 2006): C1 & C11.

U.S. Economy Can Prosper, Even if G.M. Does Not

The fragility of success for large corporations is documented in the early chapters of the Foster and Kaplan book that is mentioned below.

(p. 1) THE announcement last week that General Motors would cut 25,000 jobs and close several factories is yet another blow to the Goliath of automakers and its workers. But only if you work for G.M. is the company’s decline a worry. For consumers, the decline can be seen as a symbol of healthy competition.

G.M.’s sales, market share and work force have all been falling for a generation, even as the quality of its vehicles has gone up. Why? Because its competitors’ products have improved even more. Today’s auto buyers enjoy an unprecedented array of well-built, well-equipped, reasonably priced vehicles offered by many manufacturers.

. . .

(p. 3) . . . even if a new generation is drawn to G.M.’s products, recovery of its former position seems unlikely.  Other brands have improved, too:  J.D. Power estimates that for the auto industry overall, manufacturing defects declined 32 percent since 1998 alone.

There is also great pressure to hold prices down, which is bad for companies like G.M. with vast amounts of overhead.  According to the consumer price index, new cars and light trucks today cost less in real-dollar terms than in 1982, despite having air bags, antilock brakes, CD players, power windows and other features either unavailable or considered luxury options back then.

This means that during the very period that General Motors has declined, American car buyers have become better off.  Competition can have the effect of ”creative destruction,” in the economist Joseph Schumpeter’s famous term, harming workers in some places, while everyone else comes out ahead.

. . .

As it continues to shrink, G.M. may serve as an exemplar of what the world economy will do in many arenas — knock off established leaders, while improving quality and cutting prices. In their 2001 book ”Creative Destruction,” Richard Foster and Sarah Kaplan, analysts at McKinsey & Company, documented how even powerhouse companies that are ”built to last” usually succumb to competition.

Competition can be a utilitarian force that brings the greatest good to the greatest number. Someday when the remaining divisions of General Motors are bought by some start-up company that doesn’t even exist yet, try to keep that in mind.

For the full commentary, see:

GREGG EASTERBROOK. "What’s Bad for G.M. Is . . ." The New York Times, Section 4 (Sunday, June 12, 2005): 1 & 3.

(Note: the ellipsis in the title is in the original title; the ellipses in the article, were added.)

The full reference to the Foster and Kaplan book, is:

Foster, Richard and Sarah Kaplan. Creative Destruction: Why Companies that Are Built to Last Underperform the Market—and How to Successfully Transform Them. New York: Currency Books, 2001.