Articles tagged 'innovation'
John Kay is one of the most lucid, accessible economic thinkers out there: pragmatic, insightful, skeptical and perhaps most importantly not prone to hyperbole. If you don’t already read his weekly FT columns (also archived and published here), I highly recommend them. (Perhaps one day I’ll get the opportunity to meet him, and be able to convince him to join our advisory board.) His column yesterday, “Why ‘too big too fail’ is too much for us to take” was particularly articulate and on target:
Commercial success and democratic election are the only sources of legitimate authority in a society that no longer relies on spiritual leadership nor respects hereditary titles. An organisation exempt from either of these disciplines represents an unaccountable concentration of power. As we have today at Citigroup, Barclays and Deutsche Bank.
If “too big to fail” is incompatible with democracy, it also destroys the dynamism that is the central achievement of the market economy. In principle, there is no reason why disruptive innovations and radically new business models should not come from large, established, dominant companies. In practice, the bureaucratic culture of these organisations is such that this rarely happens. Revolutions in business generally come from new entrants. That is why so many of today’s market leaders – Microsoft and Google, Vodafone and Easyjet – are companies that did not exist a generation ago. These companies could not have succeeded if governments had been committed to the continued leadership of IBM and AOL, AT&T and British Airways.
If there is one single learning we as democratic capitalist societies need to take away and apply in earnest from the Crash of ’08 it is to put in place mechanisms, policies, regulations, norms – whatever is needed, to ensure that no private or public commercial entity is ‘too big to fail.’ The externalities on society are too important (and the mis-pricing of these is probably the largest contributing factor to the excessive rents that accrue to such entities in times of stability.) The wonderful thing is that with the technology and economic infrastructure of the 21st century, it is entirely possible to implement a market-based pricing of intangible externalities if – and sadly this is far from a given – sensible, good faith laws and rules are put in place. The markets in pollution permits is an obvious example, although as has been seen in the carbon markets, all too often we see the entrenched power of incumbents forcing a distortion of the rules to dilute their effectiveness (think free allocation of CO2 permits vs. auctioning.)
(One of) the analogs in finance you could imagine would be a market in Central Bank liquidity rights: the right for a bank to borrow say 12mo funds from the Central Bank at a set rate or margin. Banks would have to hedge the committed lines of credit they extend with these liquidity rights. Designed correctly (tricky no doubt but doable), these could trade in a free market, with the Central Bank auctioning off and participating in secondary market operations to manage their supply and demand. With these you could actually price liquidity (perhaps not perfectly but still) and if they had existed, I suspect that banks would have been much more cautious before writing trillions of dollars worth of committed back-stop facilities to structured finance vehicles (SIVs, etc.) and corporates at derisory pricing.
For those of you that aren’t bankers – for years these kind of facilities were written even for weak credits with tiny commitment fees, most between 5-15 basis points (ie 0.05-0.15%.) They were never ‘expected’ to be drawn, and so were often treated as free money when in effect they were just out-of-the-money options sold without regard to the tail risk. Another ‘picking up nickels in front of a steamroller’ strategy that failed catastrophically. Of course everyone knew that these facilities were underpriced, and for most banks (but some of the dumb money smaller banks) they were notionally acknowledged as loss leaders to win other business. This in itself is not a problem per se. The problem arose because these ‘loss leaders’ actually made revenues and accounting profits (of course while storing up enormous contingent risks but these were invisible and seen as so unlikely as to be irrelevant, just like for super-senior CDO tranches) and so it was only too easy to keep selling more and more of them. A loss leader than makes you money: what’s not to like about that?
John Kay finishes his argument with a succinct recommendation:
“Too big to fail” – whether the claimant is a bank or an auto company – is not a status we can live with. It is both better politics and better economics to deal with the problem by facilitating failure than by subsidising it.
There has been much noise (on both sides of the Atlantic) on the appropriate role of government with respect to giving a financial boost to new ventures and entrepreneurs, especially given the vast sums that have been targeted towards failed giants. This is a debate for another time, but I suspect the single most effective thing governments could do to help entrepreneurship, innovation and economic renewal sustainably, over the long term and with the least risk of unintended consequences, would be to heed Mr. Kay’s call and ensure that henceforth no company in any sector is ever again too big to fail.
Ok…if you (C-Suite executives of Fortune 1000 financial institutions, commanders of capital and asset allocation, etc.) won’t listen to me, at least please listen to Fred. He’s a legend. He’s a star. He’s got 20k+ Twitter followers. And most importantly, he’s bang on:
[Don't ignore the slides. Go back. Click through the deck. Please.]
What he said.
Oh, and never underestimate the value of looking at the world through a different lens (link to my – now very old – AmazonBay video).
Media? Well yes but…
Manufacturing? Depends really…
Oh, yes there it is…Banking! No wait, bigger…financial services!!! Yep. Busted. Definitely broke.
My quote of the day today from Paul Graham reminded me of why Amy and I created Nauiokas Park:
Don’t look for solutions, look for problems. Look for stuff that seems broken.
For several years Amy and I have been pointing out the fact that many aspects of the traditional banking business models were clearly broken or at least no longer fit for purpose, and as such subject to (catastrophic?) failure. Almost six (!) years ago, in May 2003 when I wrote this article – Minority Report: Capital Markets in the 21st Century – it (mostly) seemed to fall on deaf ears. My 2003 recipe I imagine has a few more supporters today:
I wrote:
Firms in our industry are constantly reshaping themselves: merging this business and that, creating new teams and silos, breaking down walls on one hand and building up new ones on the other.
For the most part this combinatorial ballet has avoided real innovation and has yet to break free from the chains of past experience. It is a classic example of turkeys not voting for Christmas. But clinging to the status quo only avoids the inevitable. The death of the salesman. And the trader. And the syndicate manager. Etcetera.
Not only did banks cling to the status quo, in the subsequent years as we all now know, they rode it past the point of exhaustion, past the point of diminishing returns to almost no returns and magnified these with enormous doses of leverage. But the main thing is, coming back to Paul Graham’s insight: great opportunities arise when things are broken. And it is this opportunity – the opportunity to re-invent a new financial services paradigm for the 21st century – that we are so excited about. And since it is a whole industry that is broken, rather than start one company, addressing one problem, we think the best way for us to be successful and help to drive this change is to participate in creating many new businesses, support many entrepreneurs, help build a new financial ecosystem. Change the world. World peace. (That last one is admittedly a ‘stretch’ goal…)
A really interesting interview* with Judy Estrin (senior technology executive and author of Closing the Innovation Gap) via the good folks at McKinsey, on how companies should manage innovation:
I like to compare large businesses to factory farms. What they are supposed to do is produce things predictably at scale. And surprises aren’t welcome; you just want to mass produce and so the way you manage a factory farm is with techniques to eliminate surprises, eliminate defects, be close to your customer, optimize productivity and efficiency. And then what you want is little gardens or greenhouses, not one big lab but small gardens or greenhouses that are loosely connected to the businesses. So they might be located within a business unit, they might be in a corporate group – it depends on the culture of the company where they should be located. They might be outside of the corporate walls; it may be connections with companies in Silicon Valley. It’s all about nurturing, it’s all about surprises. It’s all about having no goals. It’s all about gaining information and being prepared for the future… Having a vision, having a shared purpose – those people can’t get isolated from what the corporate mission is because then they’re off in left field. But this loose coupling…and you don’t want to manage them the way you manage your day-to-day business.
It’s great to hear someone with Judy’s experience and credibility articulate many of the important ideas on the structural failing of corporate innovation; understanding and mitigating these failings is a key pillar in our business plan and value proposition. And obviously at Nauiokas Park we love her garden metaphor!
* unfortunately McKinsey is another site who doesn’t make it easy to embed the video elsewhere, so a link is the best I could do.
One of the most important ideas one can understand from reading Kurzweil is humans propensity to think of the future as a linear extrapolation of the present when very clearly in many domains the appropriate framework is exponential change – the power law. A good way to get better at thinking in power laws is to look in the rear-view mirror from time to time, a great example of this being Bret Swanson’s recent look back to 1992 (at Forbes.com).
Today, an average consumer can buy a terabyte hard drive (1 million megabytes), on which she might store her family photos, videos and other digital documents for as little as $109.99. In 1992, a terabyte drive, if such a thing had existed, would have cost $5 million. The chief digital storage medium at the time was the 3.5-inch floppy disk, which held 1.4 megabytes. When digital photos came along and consumers found the huge square disk could only hold one photo, it was instantly obsolete.
In mid-2008, the four-gigabyte (or 4,096 megabytes) flash memory chip in an iPod Nano cost $25. Late in 2008, four-gigabyte flash cards and USB drives are selling for $14.99. But back in 1992, four gigabytes of flash memory would have cost $500,000. This means a hypothetical iPod Nano circa 1992 would have set back the teenage Nirvana or Boyz II Men fan around $3 million.
Apart from research scientists and a few early adopters of Compuserve and AOL, the Internet essentially didn’t exist in 1992. Monthly Internet traffic was four terabytes. All the data traversing the global net in 1992 totaled 48 terabytes. Today, YouTube alone streams 48 terabytes of data every 21 seconds.
He goes on to worry about the possible damaging side-effects of the current swing towards massive government intervention in the economy:
But innovation is by definition unexpected. We can’t force it or compel it. Certainly not from Washington. The dramatic centralization of money, power, information and influence now under way seriously threatens the entrepreneurial revelations and technological revolutions that drive long-term growth. If we quasi-nationalize the energy, finance, auto and health care markets, and possibly bar dynamic new business models on the Internet, as with possible network neutrality regulation, we will close off many of the most promising paths to needed efficiencies and, more important, new wealth.
I sympathize with his anxiety; while overall I would grudgingly endorse recent government economic interventions (as lesser evils) I would be much more comfortable if the explicitly stated goal was to facilitate an orderly winding down of the many obsolete corporate institutions in order to make way for a new crop of vibrant, innovative, 21st century-adapted companies and sectors. Basically a giant defeasance scheme for the old economy. (There is precedent for this – Charbonnages de France comes to mind…)
Of course this is what Perez had in mind when she spoke about the disconnect between techno-economic and socio-institutional paradigms…
I’ve been mulling this over for years, but with the release of the iPhone 18 months ago, it became easier to start to imagine the outlines of this future.
Broad reaching changes will emerge from the bottom up – this recent article from Macworld illustrates some possible examples:
…there’s incredible power in a device that knows where it is and that can purchase stuff based on its location…We already have an example of this power in the form of iPhone-friendly Starbucks outlets. Walk into such a Starbucks and a new Starbucks entry appears within the phone’s iTunes application. Tap it and you can learn what’s recently been played in the store and then purchase one of these tracks simply by tapping a Buy button…
It’s 11 a.m. and time for your coffee break. Leave the office and stroll the 14 steps to the café next door. Your iPhone vibrates and asks if you’d like the usual double-wet cappuccino. Of course you do, so you tap Yes. Within a minute your name is called and you have your caffeine-rich libation in hand. Again, no cash or credit card necessary because your iPhone automatically picked up the tab.
It’s not (yet) as sophisticated, but the success of mobile-based payment systems like M-Pesa in Kenya is not only very exciting but is a precurser to much much more. (I first wrote about M-Pesa in November 2006; seeing opportunities like this with no way to ‘participate’ was a significant motivator in developing my current venture.)
(from the CGAP technology blog:)
Since its introduction in March of 2007, the M-PESA application has had great success all over Kenya. There are currently over 2.3 million registered users. Over 18 Billion Ksh had been moved through the system, via person-to-person transfers.
Some of the work that I have been doing makes several arguments as to why M-PESA has become so popular. Firstly, it is the young, male, urban migrants who are driving the uptake of services – customer adoption. These migrants are what innovation researchers call ‘early adopters’ of a technology. They are usually better educated and earn higher incomes than those in the village. Because these migrants are the senders, they can choose the channel for money transfer…
…Despite these cash float problems, the majority of customers in both the urban and rural areas assert that they prefer M-PESA over other money transfer services. This means that M-PESA must be offering them some kind of substantial benefit. In Bukura, this benefit comes in the form of savings on transport. Customers do not need to travel into Kakamega, the nearest town, to access the service. One elderly farmer commented that “I can just walk from my shamba (farm) and get money. I don’t have to spend and go into town. If the agent does not have cash today, then I will come back tomorrow. It is cheaper to wait”. Finding strategies to manage the cash float problem will undoubtedly be one of the greatest challenges for Safaricom. For now, however, it seems like customers are willing to accept the inefficiencies of the service. It is, after all, cheaper to wait.
One of the revelations (to me at least) of this year’s Supernova conference was Ken Banks of kiwanja.net. For anyone interested in the innovative use of mobile communications in developing markets, his essay “Mobiles in Africa: A Travellers Perspective” is a must read. (Sadly, I didn’t get the chance to meet him as I had to rush off but hopefully I will get a future opportunity.) An exerpt:
When it comes to mobile innovation, the gap between developed and developing countries is not much of a gap at all. Mobile innovation in the West, largely technology-lead, sits in contrast to that in the developing world where combating the geographic, economic and cultural constraints of users is considered a more sensible way to go. This explains the emergence of the torch phone, for users who live in areas with little or no regular light, or multiple phone books for users who share their phones with family members. On the heavyweight side, a plethora of financial applications have hit the streets, with Safaricom’s m-Pesa service getting by far the biggest press to date…
…Innovation is not always as official or formalised as this, however. People in developing countries are rarely simple, passive recipients of a technology, and rarely wait for outsiders to provide solutions to their problems. The entrepreneurial spirit is alive and well, evident by the masses of thriving small businesses you find on the street corners of every village, town and city.
Many developing countries for all intents and purposes have ‘skipped’ the fixed-line telephony paradigm. Wanna bet that they ‘skip’ the branch banking/atm paradigm in retail financial services?
I know it’s not their typical market target, but I’d love to see Apple (or RIM) develop a ‘rugged’ iPhone (analogous to ‘rugged’ mobile hard drives), targeting emerging markets. Not as a competitor / replacement for existing mobile phones, but as a substitute to personal computers: effectively giving traders and business people an effective web appliance (ideally with Skype pre-loaded!)
As we start talking to people about our investment universe and the pillars that underlie our investment thesis – which is centered on identifying and catalyzing disruptive (technology-enabled) innovation in financial services and markets – when we mention that one vector we will look to target is opportunities in ‘frontier’ markets – in particular Africa – we get some puzzled looks. Especially with people who haven’t been long-standing or assiduous readers of The Park Paradigm and haven’t come across my previous posts on the subject.
In a nutshell, it really comes down to the power of looking at the industry from a completely different perspective: understanding how markets and financials services can be made to work in the context of sub-saharan Africa, necessarily forces you to see the industry through a radically different prism: infrastructure, distribution, price points, market structure, etc. So not only do native opportunities exist to vastly grow financial service and markets from very small existing starting points, but also by doing so I am convinced that a number of non-intuitive and powerful learnings applicable to innovating in this sector in developed markets will emerge. And that’s why Africa is actually an obvious element in our strategy and worldview.
Here’s an interesting take from Stuart Henshall via the Supernova 2008 blog:
The mobile is making low income groups more efficient and productive. Less time waiting and more time working or getting a better price etc. It will also mean they come at other technology products from a mobile technology perspective. Will one of these users ever part with a mobile and want a laptop instead? What if your next choice is a used smart phone or a laptop? What are the trade-offs? Or will you just settle for a TV and make the phone last longer. My bet is on trading up or passing on the computer or TV.
Here we have stopped thinking about bazaar’s and marketplaces. We go to the supermarket. It’s a very very fortunate few that can go to a tailor or have their clothes made. Yet when I walk around India I see vege traders, and sari makers everywhere. They both make efficient use of their inventory and their labor. I see use of missed calls to make “tacit connections” at no cost. I see SMS use and notifiers growing. In fact many of these users are subscribing to SMS notification services for sports and business because they want that greater connection. They are not yet overwhelmed. They are in effect on an accelerated course of “connectivity”. We need to look here to see how mobility and knowledge sharing is changing.
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