Friday, May 30, 2008

Reclusive billionaire gives $50 million to the Legatum Center

Cool article in the Guardian that includes three pretty sweet social entrepreneurs:

1) Craig Doescher, my friend from MIT who besides knowing more about the auto manufacturing supply chain that anyone I've ever met, is working to bring hand-made toys to the US from Honduras. This post couldn't possibly be complete without a picture of Craig laughing at my horrific karaoke rendition of Bon Jovi's It's My Life sung in some type of imperial karaoke house in Guangzhou, China.

2) Iqbal Quadir, one of the rainmakers who did Grameenphone (now a $4 billion company) and esteemed graduate of my alma mater, Swarthmore College. He's the current head of the Legatum Center which is doing all sorts of very cool things in developmental entrepreneurship.

3) A reclusive billionaire named Christopher Chandler, who I can honestly say I have never heard of. He has done such a good job being reclusive that his Forbes billionaire profile doesn't have a picture. Nice. But he's cool in my book for giving $50 million bucks to some of the smartest and gutsiest people doing work in the developing world.

I just got on the mailing list to work on the Google - Acumen methodology for measuring returns on social investments, and I have the feeling that this type of bet will have an extremely high ROI. Bravo.

Thursday, May 29, 2008

Cambridge Open Innovation Workshop - Further Reading

All of the slides from the presentations at the Cambridge Open Innovation Workshop are now posted here.


Wednesday, May 28, 2008

Cambridge Open Innovation Workshop - Session 5

First off, I must say that this has been an excellent workshop put on by the MIT-Cambridge Exchange, and the Program for Regional Innovation. Stuart Madnick, Chander Velu and Sam Samarawickrama. Cambridge is really a wonderful setting for an academic setting and our hosts were wonderfully friendly and welcoming.

Overall, the content has been fantastic. Each of the five sessions provided value from the academic and the business perspective. I know the link to this blog is being distributed to forum presenters. If any of you would like to post your slides or additional details on your work, please e-mail me at tedchan@gmail.com. Ten minutes wasn't enough to go in-depth on a lot of the work that was done.

Session 5 was about innovation ecosystems and it was interesting to hear about what is going on in the EU versus at MIT versus a new initiative in the Middle East.

Both Professor Stuart Madnick and Professor Georgeta Vidican from MIT talked about the Masdar City iniative in Abu Dhabi. This is a pretty ambitious effort by the UAE to help diversify their economy by creating a leading worldwide research and academic hub focused on innovative research and generating intellectual property. How much is being spent to do this? Well, $22 billion to build Masdar City, and then $15 billion for the Masdar Initiative. So clearly, they are not kidding around. There are a lot of questions about how to do this that both Stuart and Georgeta have been looking upon. There is need to understand the university’s view in the local economy. There is a need to understand what industries are viable regionally and perhaps compare to ecosystems that have evolved them in other cities. For a new university, there must also be mechanisms for knowledge exchange and growth.

There has been a lot of talk in academia about fostering innovation ecologies, whether it’s cities or countries trying to create the next Silicon Valley, or Ken Morse helping universities in Spain, New Zealand and everywhere else to simulate MIT’s ecosystem. These talks followed along those lines. Chuck Eesley actually talked specifically about the MIT innovation system, highlighting competition, flexibility and a deep commitment to research as keys. He mentioned a four success factor that I thought was especially interesting – an enthusiasm for opening doors. That is really something I have noticed during my time at MIT – in the ecosystem, there are structure to help you get access to everything you need to successfully innovate and commercialize technology, from advice to funding to technology.

Dr. Linas Eriksonas discussed funding industry-academy partnerships in the EU. Here there is clearly concentration in certain regions, along with certain universities/industries that are better at getting EU funding. Andre Slowak’s talk also tied in with policy – he discussed a number of policy issues in the UK that are driving regional innovation. I have to admit that these two talks went a bit over my head as someone who is not from Europe. I would invite anyone who can provide a better summary to e-mail me.

Cambridge Open Innovation Workshop - Session 4

Fardad Zand from the Delft University of Technology in the Netherlands opened up session 4 with a practical talk on how information technology facilitates innovation. I had sat next to Fardad and the night before and he struck me as a very rigorous research with some interesting ideas. The complexity of Fardad’s ideas is pretty difficult to go through in ten minutes. His research shows that collaboration means innovation on dimensions of intensity, novelty and success, with IT as a facilitating factor. He uses some interesting measures such as computer density (computers/employees), IT orientation (sales via IT/total sales), etc. to measure these. Fardad had to zip through the rest of his slides, but I think there is a lot there. This is the type of work where the meat is in the underlying details. We all can intuitively feel IT increases innovation, but Fardad is delving deeper into more granular factors. Sounds like this would be worth learning more about.

Michail Batikas talked about firm contributions to FLOSS (Free/Libre Open Source Software). This was a question that was asked a number of times during the weekend, and is a common topic of discussion at business school. Exactly how much should companies give away? Michail is building a model to assess the motivations of firms to contribute to FLOSS communities. His methodology is both qualitative and quantitative and in the early stages, but something to follow in the future.

Next up, Georgious Varaxoglou from Leeds University Business School gave an interesting talk about the process of technological innovation focused on the UK police force. It was an interesting study precisely because it wasn’t very CSI Miami – innovation seems to come slowly, but collaboration tools are becoming more important. E-mail has become widely used, with online platforms like Sharepoint (good luck if they use that) and intranets slowly gaining adoption. Systems integration also seems to be a major issue with multiple systems requiring many different passwords.

Finally, one of the coolest talks of the weekend was by Mandy Chessell, a master inventor who works for IBM. She has filed for 41 patents, 16 of which have been granted!

IBM has developed an Academy of Technology in the UK with its governance structure and many talented technologists. This is an innovation ecosystem that IBM has specifically developed to grow ideas in collaborative environments outside of corporate bureaucracy.

Mandy highlighted some of the characteristics of successful ecosystems, including:

  • Shared benefit for all participants, especially researchers. This means an equity stake in innovations.
  • Active engagement that moves towards trust and a common goal
  • Agreed intellectual property structure from the very beginning, tied in with point #1 about shared benefits.
  • Adequate resources to deliver on promises. Not getting the resources needed will sour the innovation ecology rapidly.
  • Diversity and appropriateness of skill sets to achieve desired innovation goals.

Mandy then talked about the changing nature of innovation and who is involved. Employees, businesses, partners and customers are involved. But so are a new generation of Generation Y-ers who live and breathe technology and are extremely networked and collaborative. Very interesting talk that highlights a cultural and corporate shift in philosophy with regards to innovation.

Thursday, May 22, 2008

Cambridge Open Innovation Workshop - Session 3

The following are notes from the first session of the Open Innovation Workshop at Cambridge University in the UK May 22nd and 23rd of 2008.

Key questions posed for the third session of the Cambridge Open Innovation Workshop by Professor Peter Williamson of Cambridge’s Judge Business School were as follows:

Where does open source fit into the current and future business models of different firms?

-Reaching critical mass
-stimulating and leveraging investments by others
-speed up innovation by harnessing diverse capabilities and experience

Where do we find these profitable business models?
What are the tensions between open source, control, quality and value capture?

Value Capture (X-axis) vs Value Creation (Y-axis)

High Value Creation, Low Value Capture: Open standards – good for society, few rewards to innovators (other than fame). Examples: Linus Torvalds, Tim Berners Lee
High focus on value capture, low focus on value creation: Killing the Golden Goose – narrow focus on profitability restricts ecosystems
“Magic quadrant” - Ecosystem leadership – growing the ecosystem and securing profitability.

So how do we get to the magic quadrant, especially when open innovation (especially when not customer centric) often produces products that can fit oddly into the marketplace (think open source software).

Lorraine Morgan from the University of Limerick touched on a topic, Open Source business models that is a frequent topic of discussion in the IT and innovation communities. The main question Morgan deals with is this one: How does a firm create value for the customer while capturing some of the value for itself?

Nick Wainwright and I had an interesting conversation where he mentioned that supporting open source can be an effective way to subvert a powerful market leader. Look no further than IBM supporting Linux almost a decade after OS/2 bombed. While the benefits to IBM were great, the appeal of hurting Microsoft must have been nearly as attractive.

As Morgan discusses, understanding the components of the value chain is difficult in open source. She uses a model breaking it into value creation, value capture and the value network. However, many of the traditional frameworks fail for open source. For instance, traditional resource-based views are concerned with value appropriation, which is strongest when intellectual property is owned. Thus, they have little explanatory value about when open source software is a feasible strategic option. Morgan has a strong understanding of the literature around this issue and as a first year PhD she has posed a lot of interesting questions that many are seeking the answer to.

Dr. Christina Raasch from the Hamburg Technical University’s talk focused on using open source outside of the software business. Some models she is looking at are open content such as cultural goods, open science and bioinformatics, and open design such as hardware, transportation and consumer goods. I listen with interest, since I am working on an open content model startup right now and staring at pushing the stone uphill to get it to critical mass in terms of content. When I reflect on it, content is a substitute for credibility, which a startup doesn’t have much of.

Raasch’s model is more sophisticated than my thinking. She breaks it up into economic, social, technical and legal aspects. However, credibility goes a long way towards getting people to contribute to an open source project.

She mentions a “bazaar governance” structure for open source management. With open source projects to develop physical objects such as cars, network effects, access, and other issues of project governance are different than open source software.

Maha Shaikh, a post-doctoral researcher from the London School of Economics talked about a shift in focus from open source products to process.

Why open source? She started up by summarizing some reasons to open-source:

  • Reduce lock-in to commercial software
  • Company-wide or OS community access to expertise
  • Reduce R&D Costs
  • Speeds up time to market
  • Better code quality through scrutiny
  • Better quality product through visibility

Shaikh wants to do additional research to validate these general assumptions. They’re all good questions, but it sounds like a challenge as these are so product and situation specific.

Product focus open-sourcing

Charter-sourcing - Low innovation, relatively small projects where software development is outsourced.
Symbiotic Source –Get supporting code with version control for software projects (underlying source code for a bigger project). Example, GlueCode.
Coalition – Alliance of strategic convenience
Mature source – Use commercially mature open source software.

Processed Focused
Talent sourcing – Build relationships with external communities, requires companywide adoption of open source ideology.
Portal Source – Access to a large pool of talented developers exploiting distributed intelligence.
Open Outsourcing –Open source philosophy with open standards.
Inner Source – In-house research department with high transparency, sharing. Gary – Inner Source – Bell Labs, IMB, HP, Sun, Phillips Medical. Take open source and bringing inside the company.

After Shaikh’s talk, there were a few interesting questions.

Nick Wainwright, who spoke earlier in the day. He asked about addressing the nature of the license. Some have political intent, some reserve rights while some are almost completely open.

Raasch indicated that physical objects, licenses cause a lot of problems. Each project tries to develop its own license so it is problematic. A more general license procedure in the product realm similar to GPL and the like would make things easier.

I asked a question about free public license conflict and the complexity of managing a code base, specifically mentioning Black Duck Software, Doug Levin’s Waltham, MA company that is making a killing helping companies understand just what exactly is in their code base. The panel agreed that it was important to focus when deciding what software with what existing licenses what the end results you are going to use it for.

Satya Dash asked Raasch a question about how much project management actually works in a open source environment?. Raasch has seen different approaches, but stronger, proactive project management tends to result in better project, as opposed to decentralized, more informal. Central interfaces are very valuable. Raasch also suggested that timelines are valuable, especially when the project is funded.

Marshall Van Alstyne finished the day by presenting research about Innovation, Openness and Platform Control. His research is funded by the NSF, Cisco and Microsoft.

Some key questions addressed by Van Alstyne’s talk:

  • How do business actually make money off open innovation?
  • Can intellectual property regimes be used to promote downstream innovation?
  • How do sponsored platforms (as opposed) to standards create value?
  • Does competition threaten or enhance innovation?

Van Alstyne went into a number of interesting examples of how downstream enhancement can add value. Examples:

  • Google Maps – Paul Rademacher – combines Craigslist with Google Maps. Lawyers say sue. Engineers say hire him! It’s now a staple of Google Maps and central to their strategy of bringing local information to the individual.
  • Metallica originally sued. Radiohead allows re-mixing, but if you post them back, they own it. Marshall doesn’t think they got this right.
  • Linden Lab allowed people to actually own property in 2nd life. Applications allow downstream innovation by users which has been central to their success.
  • Facebook ‘s rapid growth once they open the standard.

What’s the economic model behind opening platforms up? An initial sponsor offers platform value of V. Developers build value by creating new layers of application. In the future, the sponsor can bundle developed work in with their application to increase value extraction. Meanwhile, if developers have been treated fairly, sequential rounds of innovation can occur.

According to Van Alstyne, sponsor and developers divide surplus based on Nash bargaining.

Economics can also account for value added by developers. The price is limited until the platform sponsor bundles application into the open pool. Output is Cobb-Douglas – the open resource pool is added to production.

So how should a firm manage the platform ecosystem? How open should it be? And when should new features become free parts of standard platform? In this case, it’s a spectrum, the more closed, the more you can charge upfront. The more open, the more others can add value. A firm should open a platform enough that the opportunity cost is proportional to the growth in value (elasticity of output). Addressing the latter question, firms should fold new features into the platform at the point time where the value of next generation output passes current generation.

Van Alstyne then asked: Who will win the next generation of the fight between Apple (iPhone) versus Google Android? Some advantages of open platforms versus closed:

  • Closed doesn’t require you to sacrifice platform project.
  • Closed allows you to selectively contract. To this end, private subcontracts dominate when developer pool is small. Open innovation dominates as network effects rise.
  • Open give you network effects from low cost experimentation, transparency, lack of hold-up.
  • Open allows users to see, modify or redistribute code which can lead to network effect benefits.

When does open beat closed? Originally, Apple was a lot more closed than Microsoft.
Microsoft opened up and a lot more software got developed. Van Alstyne points out that Android has already force Apple to open up some of its iPhone APIs. Another example is Cisco, which allows others to experiment on their platform. Cisco then buys the best ones (usually at market research).

Does competition deter innovation? Traditionally, you reduce innovation because you curb profits and if people can’t profit, they won’t enter. Google supporting Firefox is another example of subverting Microsoft.

Increasing developer competition decreases openness and innovation. Reason – if downstream profits fall, platform sponsor loses interest in subsidizing developers. With less open platform, developer output falls. One good question pointed out that this is non-linear, as companies have virtually no incentive to innovate when there is no innovation, but high competition results in inability to attract sufficient rents. That’s one reason to me why it is scary to be investing in energy right now with some of these models that seem relatively easy to invent around.

Increasing platform competition increases openness and innovation according to Van Alstyne. If a platform sponsor faces direct competition, the marginal value of downstream royalties rise relative to the marginal values of sales. Thus the platform opens! Look no further than the aforementioned Google Android versus iPhone example.

Prisoner’s dilemma keeps developers from cooperating naturally. Both want to develop on one another’s stuff. Everyone wants to use one another’s code to build on, but it becomes a “You give me access first” prisoner’s dilemma. This becomes a multi-party negotiation problem. In this case, you eed platform sponsor to give access to it (Think Microsoft bundling a browser, instant messenger, etc. into their platform). When that happens, the platform value grows greatly.

According to Van Alstyne, optimal choices substantially grow the platform, benefiting the sponsor, users and developers (lots of economic surplus to go around!) Overall, I thought Van Alstyne's talk was one of the best at the conference. He is bringing a real scientific framework to innovation and that is very much needed.

Cambridge Open Innovation Workshop - Session 2

The following are notes from the 2nd session of the Open Innovation Workshop at Cambridge University in the UK May 22nd and 23rd of 2008.

Sungjoo Lee from Cambridge University talked about some of the attributes of open innovation in small and medium enterprises. Some of these traits included:

  • SMEs have advantage in flexibility but disadvantages in scale
  • Challenges transformation invention to innovation (and to commercialization).
  • Intermediaries to facilitate open innovation are helpful. Roles are to maintain a relevant database of information and contacts, create the network and perhaps most importantly, create a collaborative culture.
  • Customer-provider, strategic alliance or inter-firm network are common models

·

Charlotte Wieder from PCO Innovation (Montreal and France) and the Grenoble Institute of Technology provided an interesting framework for an innovation audit tool. Her framework consists of four agility drivers:


  • Uncertainty Management
  • Knowledge and Learning Management
  • Multiple Valuations Management
  • Collaboration Management

Each of these comes with a best practices grid that breaks each area into more granular areas to assess. Wieder didn’t have time to go too in-depth into the specifics of her model, but her work strikes me as important because it addresses some key gaps in the management of innovation. Specifically, there is a lack of process checklists and metrics for the innovation process. These are very difficult to make generalizable, but I have to applaud her efforts to do so as the innovation movement needs far more of a scientific/best practices aspect to it. It sounds like her research is definitely worth a read in the future.

Ethan Mollick, a PhD from the MIT Sloan School of Management gave a talk called “Notes from the Underground” which was undoubtedly the most entertaining so far. Ethan’s work focuses on user based innovation by the individual. Ethan pointed out some pretty interesting statistics with regard to the Sims – its users have created 20,000 kinds of chair, nearly 100,000 articles of clothing and 52 different goatees. Video games rule.

Ethan’s larger point is that communities and companies have become tightly aligned. Allowing user modifications has boosted revenue and adds features at little or no incremental cost once a platform has been created. It means strategies beyond just making a video game and putting it out there. There need to be mechanism to reward community members who participate. For instance, allowing them to keep a piece of the revenue, giving them access to features or new releases, and having external forums where credit can be amply taken and given. There must be formal mechanisms to listen to users, and for users to share ideas about what they want.

David Simoes Brown talked about how NESTA is promoting innovation in the UK. They are providing intermediary services to help innovations create more commercially viable products. They have helped form venture operations and collaboration program for large firms (for instance, Rolls Royce, McLaren Applied Technology, BBC Labs, Shell GameChanger.)

Corporate open innovation is still in the early adopter phase that needs more proof of effectiveness. There are still many barriers, according to Brown, but overall, much more attention needs to be paid to human factors.

The discussion part was interesting, especially when they discussed how to handle the key issues of intellectual property. Wieder said there should be a common typology for different types of collaboration – a great idea, but not sure how this could ever happen. Simoes Brown really felt that on the path to commercialization, there should be a spirit of sharing. What he said is fairly idealistic in terms of how companies actually work though it appears. The moderator Tim Minshall summed it up nicely by saying “Never spend too much money or lawyers – or too little.”

Cambridge Open Innovation Workshop - Session 1

The following are notes from the first session of the Open Innovation Workshop at Cambridge University in the UK May 22nd and 23rd of 2008.

The first speaker of the workshop was Carlos Sato, a PhD researcher at the University of Sussex in their Science and Technology Policy Research group, which is called SPRU. Carlos talked about British Telecom and how they are working to be more innovative.

One very interesting point Carlos made is that BT is both a services and an infrastructure company. Currently, these two are inseparable in the existing architecture, but BT is working to separate these to make innovation easier. That is, every new services project is intrinsically requires an infrastructure project as well. BT is trying to change this by the decoupling this. They would like their infrastructure to be a platform that services can be built off of. This platform consists of standards, architecture, middleware and the data pipes that are needed for standard services platform. This decoupling if executed successfully would make the services project portfolio far more cost-effective. Additionally, this would make it easier for outside partners to develop services on top of BT’s pipes. Overall, this all helps BT move towards being an integrated solutions provider for multi-national type firms.

Carlos also mentioned BT is using Web21C principles for distributed innovation. Definitely something to google.

Three interesting questions Carlos asked but we did not get to discussing: Will BT become a pipe only provide? Could BT possibly become a content provider? Lastly, is Google a competitor of BT?

Valerie Sabatier presented next about Protein eXpert, a company that has an interesting strategy with regards to open innovation. Essentially, they contract out their employees as experts to drug researchers. In doing so, they work closely with clients to create the innovations necessary to manufacture a drug. PX does not patent everything, nor does a client get a patent. Beyond payment, PX considers a key part of the value the ability to re-use information, processes and technologies developed. In a way, PX is similar to any other consulting firm. Their key assets are their knowledge, people, and internal processes to leverage those two.

“Innovation is a contact sport like wrestling.” – Nick Wainwright, HP

HP has been a real success story, and it was interesting to hear Nick Wainwright, Director of Open Innovation in Europe talk about the role of HP Labs in that. Nick has a new blueprint for research, especially on the open innovation front. They have specifically named five areas of high impact research themes and are actively seeking proposals. By announcing these areas, they are directly signaling that they are interested in collaborative research in these areas. These five areas HP Labs mentions specifically are:

  • Information Explosion
  • Dynamic Cloud Services
  • Content Transformation
  • Intelligent Infrastructure
  • Sustainability

Nick’s talk was interesting in contrast to some recent talks I have. Recently, I interviewed Rupin Mohan and Mikko Uusitalo, both R&D directors at HP. From these interviews, I learned about HP’s stage gate process for business projects. It is very focused on delivering incremental innovation with measureable business results. It is very hard to quantify the ROI from open innovation, and Nick said as much. That doesn’t mean there is not business value however. In fact, we learned from Mikko that although HP isn’t a software company (only 2% of HP’s revenue), software, be it proprietary or externally developed, is important because it forms many of the platforms that make HP’s products useful (and profitable). Think Linux, for instance. Given the nature of HP’s clients, this software must have open standards that can be customized to suit the needs of complex enterprises.

Tim Mercer from Thomson Reuters was the last speaker in the session. He had a good description of what the Web 2.0 to the Web 3.0 transition might look like. It will be a shift from broadcasting and distributing information to information that finds individuals that it is relevant to. Thomson Reuters is a very interesting company (especially the old Reuters) in that it’s an information giant that wasn’t really all that innovative in the new information age. Reuters ran into trouble as early as 2000, and basically escaped through a ton of mergers and acquisitions, diluting the original equity of the company.

So where did Reuters go wrong? Tim said that Reuters need to be more innovative as a company, but it is not that easy. For one thing, the financial information space has been extremely turbulent over the last 10 years. Think of the types of change:

Financial Industry – A shift from traditional asset management to the proliferation of hedge funds
Media Industry – Rapid change from print to media, and traditional to web
Market – Bubble, sub-prime, 9/11, Enron
Regulatory – Sarbanes-Oxley, other fallout from Enron, SEC

Mercer mentioned one major mistake was treating their customers as just customers. In retrospect, Reuters had clients of every type, up and down the value chain. From hardware providers to banks to finance websites, Reuters sold data to everyone, but didn’t treat those relationships as an ecosystem to do innovation on their own. One of Mercer’s stated goals is to shift to use this ecosystem to collaborate with clients to create new products and services before others do. Tim strikes me as a smart leader who gets it, so look for Thomson Reuters to be more innovative than their predecessors.

Friday, May 16, 2008

Keys to realizing ROI from innovation through the lens of Iridium's failure

The following overview was written by Ted Chan in 2008 as part of my masters program at the MIT Sloan School of Management and was edited by Victoria Slingerland. If it is of use to you, I would appreciate a comment or e-mail. Please use all appropriate academic citations. I would enjoy a further dialog on the topic if you are interested.

Keys to realizing ROI from innovation through the lens of Iridium's failure
By Ted Chan

Introduction

Innovation is almost infinitely nuanced. The path that is taken from beginning to end must fit the industry, the customer and where the technology fits in the innovation cycle. This paper explores key attributes of successful project and organizational structures through the lens of a major failure. The case of Iridium is an interesting example to start from as it was a catastrophic failure. Iridium was an incredibly ambitious plan to put 66 satellites in orbit to create a global telecommunications effort. The effort failed in the end for a number of reasons. First off, Iridium didn’t create a product offering that made sense for its customers. Secondly, the Iridium organizational structure and board did not make it possible to be flexible enough or provide the right feedback for its customer. Third, Iridium was such a vast project and received so much capital early in its life that it never had the opportunity to fail fast – instead, it had such a long timeline that it became technically obsolete by the time it was completed. (MacCormack & Herman, 2001, Wikipedia)

Listening to the customer is a must

Ultimately, Iridium failed because it did not produce a viable product for the consumer market despite the massive amounts of money spent. The service they offered was expensive and did not work inside of buildings; the handset was oversized and clunky. During the nearly 10 years upon which the project was developed, technology improved substantially and Iridium failed to adjust. They got caught up in the “wow” factor of their global satellite network and failed to design a product that would be appealing to its customers.

Contrast what happened at Iridium with what happened at 3M and Bank of America, two organizations who have been extremely successful because of their ability to innovate. Bank of America has been systematic about designing services and processes for their customers using using research to verify their assumptions, and has been rewarded by substantial growth and lower operating costs. In the “Innovation at 3M” Harvard Business School case, we see 3M effectively use a lead-user technique to generate ideas for new products in the medical products industry. (MacCormack & Herman, 2001; Thomke & Nimgade, 2002; Thomke, 2003)

Generally, lead-user techniques are one of the most effective ways to identify innovations (although they tend to be incremental rather than disruptive). Talking to customers who are pushing the boundaries on the current use of your product or even modifying it to suit their needs helps identify real market requirements. (Urban and Von Hippel, 1988)

A customer advocate might be an alternative. In Malcolm Gladwell’s tale about a cookie bake-off, Barb Stuckey so intimately knows the needs of potential customers that she provides the necessary input to win the competition. In any case, it is absolutely essential to not get too focused on the elegance of a technology. Too often technology developed without a market in mind, when the reality is that companies should be looking for customer needs to satisfy. (Gladwell, 2005)

Creating a diverse advisory board is essential

Not only is input from customers important, but outside advice is essential. One of the areas in which good venture capitalists truly add value is in the structuring of the board, and bringing the right consultants and advisors to provide the proper feedback to an innovative venture. This must also be done in the right quantity. Iridium did not fail for lack of feedback – they had a massive board and many advisors. However, most of these were from partners of the project or professionals involved in the project. There was also too great a number for any real expert to make an impact, resulting in groupthink and lack of tactical flexibility in project planning. What they really needed was a smaller, more focused group able to provide outside perspective on the industry, customer needs and the direction of the venture. (MacCormack & Herman, 2001)

It was interesting to look at some models of innovation used by large companies, past and present. Xerox (now gone) is famous for having blown the opportunity to commercialize things such as the graphical user interface. As seen in the Inxight case, Xerox’s model of primarily internal advisors from the various business units was problematic. Much of the long-term vision and overall view of the potential marketplace was seen from the perspective of this internal staff, some of whom very well could have lacked a real vision of the future. Often, outside sources are needed to both be optimistic and realistic about the potential of a market and the technology offering. In this Inxight case, Xerox had a number of markets sized off by several orders of magnitude. For instance, Business Intelligence visualization was measured to be by Xerox a $15 to $25 million market in 2000. This is a major mistake that an outside advisor who understood the evolving enterprise software market may not have made. In 2006, this was a $6.25 billion market growing at 11.5% per year. If Xerox had understood these markets, it would not have struggled to tap their large pool of capital or resources to go after it. However, large, internally managed ventures often fail to see beyond the scope of their existing product and service offerings. (Chesbrough, 2001; IDC, 2007)

These two cases (Iridium and Xerox) illustrate the balance of outside expert perspectives. Once these experts are obtained, an organizational structure must be designed where their feedback can be acted upon. That means a manageable board of directors. Industry leading venture capitalists are experts at creating this chemistry and it is a substantial part of the value that they create (and reap).

Organizations must be flexible enough to change course or admit failure

Iridium was a project that got big quick and died slowly. These projects are the absolute worst for corporations, investors and entrepreneurs. Creating processes that change or kill projects that in their present incarnation cannot succeed can save stakeholders a great deal of money and frustration. In innovation and entrepreneurship, risk is inherent. Managing that risk upfront, or at least as early as possible, is key. This is why iterative project development methodologies are effective in high risk projects in rapidly evolving industries. They allow for tactical change and the greatest risks to be addressed first. In some cases, the risks may not be possible to overcome. In this event, at least a manager can find out the project will fail sooner rather than later and save money.

The pharmaceutical industry is one where knowing and acknowledging what is likely to fail early is especially important. Professor Ernst Berndt of MIT often compares pharmaceuticals to movies – high upfront cost and low marginal cost to make another pill (or put another person in the seats) once the product is made. However, the cost of failure is massive if the movie or drug was not a good idea to be pursuing in the first place. It is essential to identify which drugs may not have a substantial enough market to pursue, and to understand which drugs may have a greater chance of failing in the much more expensive Phase II and III clinical trials. GlaxoKlineSmith pursued the reorganization of its R&D group in order to better screen which projects it made the most sense to pursue, by using a stage-gate process with functional expertise to make those decisions. (Huckman, 2006)

Conclusion

Innovation is not easy. Iridium started off as a great idea, but it needed to evolve. Unfortunately, the organizational structure put in place to execute the project did not allow for it. Projects must meet the needs of customers. In order to do that, they must first listen to the customer, along with their experts, be they scientific advisors, industry experts or top managers. Even then, projects must be flexible enough to change direction or fail quickly. After all, a small failure is better than an astronomically expensive one. Only when these parameters are all in place can firms maximize the return on investment from innovation.


Bibliography:

MacCormack, Alan, Kerry Herman (2001): “The Rise and Fall of Iridium” Harvard Business School Case 9-601-040.

Gladwell, Malcolm (2005): “The Bakeoff: Project Delta aims to create the perfect cookie.” The New Yorker, September 5, 2005.

Thomke, S. and Ashok Nimgade (2002) “Innovation at 3M Corp.” Harvard Business School Case 9-699-012

Thomke, S. (2003). R&D Comes to Services: Bank of America’s Pathbreaking Experiments, Harvard Business Review.

Chesbrough, Henry (2001): “Inxight: Incubating a Xerox Technology Spinout” Harvard School of Business Case 9-699-019.

Huckman, Robert (2006): “Glaxo-Smith Kline: Reorganizing Drug Discovery.” Harvard School of Business Case 9-605-074

Urban, Glen L., and Eric von Hippel (1988), "Lead User Analyses for the Development of New Industrial Products," Management Science 34, no. 5:569-82.

Iridium (satellite). (2008, May 13). In Wikipedia, The Free Encyclopedia. Retrieved 14:45, May 15, 2008, from http://en.wikipedia.org/w/index.php?title=Iridium_%28satellite%29&oldid=212235433

Saturday, May 10, 2008

Lenovo and Infosys: An overview of two pioneering companies and the business environments in which they were created

The following overview was written by Ted Chan in 2008 as part of my masters program at the MIT Sloan School of Management and was edited by Victoria Slingerland. If it is of use to you, I would appreciate a comment or e-mail. Please use all appropriate academic citations. I would enjoy a further dialog on the topic if you are interested.

Lenovo and Infosys: Two pioneering companies and the business environments in which they were created
By Theodore (Ted) Chan
MIT Sloan School of Management

Introduction

Infosys, an Indian-based information technology and consulting firm, and Lenovo , a leading Chinese personal computer manufacturer, are remarkable companies with unique organizational structures and cultures. These characteristics allowed them to overcome challenges posed by the business climate of their countries while leveraging some of the distinct advantages. This paper describes their development in the context of their business and financing environments, and provides comparison and analysis with regards to the challenges they faced.

Overview of Infosys

Infosys was founded in 1981 and is led by now world-renowned CEO Narayana Murthy in Pune, India. The company had one unique characteristic from the beginning. Murthy established a culture of ethical behavior at Infosys that included running a highly transparent organization and not giving into the corruption that was rife in India at this time. In 2005, India scored a very poor 2.9 out of 10 on Transparency International’s corruption index and this is after what was considered to be substantial progress following the 1991 governmental reforms. Infosys gained a leading reputation as an ethical Indian company, which greatly aided its business with international firms. During this period in the 1980s, when Infosys laid much of its cultural and reputational groundwork, its growth was actually relatively slow. In 1991, after ten years in operation, its revenues were about 50 million rupees, or less than $2 million USD. (Abdelal et al. 2007, Nanda and Delong, 2002)

India provided many challenges for an emerging business with its corrupt, bureaucratic government and lack of infrastructure; however, it also offered one major competitive advantage in low-cost skilled labor. For instance, in 1994, programmers and systems analysts in India cost less than 1/10th the cost of hiring one of those resources in the US, Japan, Germany or France. (Abdelal et al. 2007, Nanda and Delong, 2002)

It was the fiscal reform early in the 1990s that allowed growth to take off at Infosys. In 1991, India was trying to overcome a severe fiscal crisis and made major reforms that were highly beneficial for businesses. The reforms of 1991 made it possible to open foreign offices, improved capital markets, and created new opportunities. It also helped to reduce the effect of the corrupt bureaucracies that hindered doing business in India. This also marked a period of intensified competition, with many multi-national corporations choosing to compete in the Indian market or setup low-cost development centers. Infosys paid its employees in the top 10 to 15% of the salary ranges, ensuring they could compete for top talent and continue to provide a product that would be considered high quality. It also was one of the first Indian firms to offer a stock-option plan. Infosys also invested heavily in a new facility that cost 130 million rupees in 1993, nearly their entire revenue for that year (95 million rupees in 1992, and 145 million in 1993). (Nanda and Delong, 2002; Kummerle, 2003)

Infosys continued to be a leader in corporate ethics and transparency in India. It was the first Indian company to use US GAAP accounting standards and meet the ISO 9001 software quality standard, along with publishing a number of audits, disclosures and reports that had not historically been part of the Indian way of doing business. (Kummerle, 2000)

Thanks in great part to the 1991 reforms, Infosys went public in India in 1993. Prior to this point, they had very little financing. As a service business, they were typically cash flow positive and had only four moderate size loans prior to the IPO. The firm rapidly took off and revenues nearly doubled in 1994 to 301 million rupees. (Kummerle, 2003) After several years of sustained growth, Infosys went public in 1999 in the US on the NASDAQ stock exchange. By the end of 2007, it employed over 88,000 employees with revenues over $3.1 billion USD and a market cap of over $30 billion USD. (Wikipedia, Yahoo Finance) It is interesting to compare these two liquidity events to the course Lenovo had to take with the less sophisticated financial markets in China.

Overview of Lenovo / Legend

The story of the company now known as Lenovo is a parable that fits well with the transformation of the Chinese economy. Founded in November 1984 in Beijing, two important developments coincided with its roots: the reform of Science and Technology System and the rise of new non-governmental science and technology enterprises in their district in Beijing.

While Infosys was a private enterprise, Lenovo had state involvement from the beginning in the form of the Institute of Computing Technology (“ICT”). What is interesting is that Lenovo’s development often seemed in spite of opposition from the state, which provided advantages to Lenovo’s state owned competitor, Great Wall. The reform of the Science and Technology system in China meant that the ICT’s funding was to be cut at a rate of 20% starting in 1985. Facing this uncertainty, the institute saw new enterprises being set up by research institutes to profit from technology businesses, including computing. As such, the new company was set up as an “institute run enterprise” and called Institute of Computing Technology (ICT Co.) With little chance of direct funding for the company, the eleven initial founders resourcefully raised 200,000 RMB that was loaned to the ICT, which then placed it on its balance sheet and loaned it to the company to provide the startup capital. ICT also provided office space, utilities, and key access to administrators within the government. A major break occurred early in the life of ICT Co. with the first project being a paid contract with CAS; the 700,000 yuan earned gave the company much needed capital. (Lu, 2000; Chen et al., 2001)

ICT Co. used this capital to pursue its first product, a Chinese word processing add-on card for the IBM PC. The product was an instant success, rapidly winning more than 50% of the market share for word processing add-on cards. This accounted for nearly 1/3rd of the company’s revenue. ICT Co. became Legend some time during this period and continued to create computing products. The 27 new profitable technology products between 1985 and 1988 accounted for approximately 80% of sales. Legend’s growth was rapid. Excluding Hong Kong Legend, employees went from 44 in 1985 to over 630 in 1991. During this time, sales revenues grew to 680 million RMB from 3 million in 1985. This growth permitted a reciprocal relationship with the ICT; the company paid off the initial 200,000 RMB loan, with an additional 3,650,000 payment over the first three years, and 1,200,000 per year thereafter. (Lu, 2000; Chen et al., 2001)

In 1987, ICT partnered with Daw, a small Hong Kong company to create Hong Kong Legend Technology Co. This operation grew rapidly, reaching $11.74 million by the end of 1988, which provided capital to purchase a manufacturer, QDI. Prior to the relationship in Hong Kong, Legend had not manufactured computer systems as they lacked the permits to do so in mainland China. Getting into manufacturing was initially a challenge for Legend, but they were able to overcome it and gain market share in motherboards. Sales grew from 30,000 motherboards in 1990 to 5 million in 1995. In Hong Kong Dollars, this growth was from $78 million HKD to nearly $2.5 billion HKD, a remarkable rate over a five year span. They went public in Hong Kong in 1993, raising $220 million HKD. Hong Kong, then still a British colony, provided the mechanism for internationalization, along with the primary source of financing for Legend to approach both the domestic and later the international market. (Lu, 2000; Chen et al., 2001)

On the PC front, the Chinese market saw a significant change in 1992 brought on by a Memorandum of Understanding signed between the US and China. This lowered import tariffs from 35% to 15% and removed many quotas and licenses for goods coming into China such as computers. It also improved foreign intellectual property rights. Legend had to decide whether to continue to manufacture its own PCs. At the time, Legend was struggling to meet its sales goals, and its operations management was somewhat inefficient, with an inventory turnover of 1.7, compared to 5 to 6 turns for its competitors. Re-organization in 1994 helped solve the issue. With a leaner, more focused sales force, and a strong new general manager, Yang Yuanqing, Legend improved turnover to 7x by 1995. They also captured 5.7% of the market that year, which was second to only Compaq and AST. (Lu, 2000; Chen et al., 2001)

In 1996, Legend seized on the fact that the foreign industry players were releasing products in China 4 to 5 months behind overseas launches, while charging higher prices due to the import tariff. Legend cut its own prices by 30% and used a first to market strategy with their new technologies, essentially offering the hottest new technologies at a lower price. As Infosys had found their local knowledge important, Legend’s understanding of the competitive landscape in China was a key advantage. In 1997, Legend captured the #1 spot in the Chinese market in desktop PCs with this strategy, gaining a 9.4% market share. Meanwhile, Legend also began to differentiate its products more based on meeting local needs. (Lu, 2000; Chen et al., 2001)

Distribution remained an important part of the business as well, as Legend continued to sell products made by Hewlett Packard, Toshiba and Sun. This distribution ability was an important company asset following the 1992 Memorandum of Understanding. Legend’s local knowledge was an advantage over joint ventures or lower quality mainland distributors that other foreign entrants had to rely on. (Lu, 2000; Chen et al., 2001)

Legend became Lenovo in 2004 and set its 2005 revenue goal at $10 billion US, a lofty target. Key to achieving this would be their Internet strategy. China has the most Internet users in the entire world, nearly 172 million users by late 2007. In 2000, however, only 1.4% of the Chinese population (16.9 million people) was on the web (double the number from six months prior). Lenovo set about being a key provider to these users. Their Tian Xi product launched in 1999, which was especially geared towards getting lower knowledge users on the web quickly and easily. As with other initiatives, Lenovo was successful in continuing to grow as the Internet emerged in China. Dr. Charles Zhang, the CEO of Sohu.com, indicated that China surpassed the US as the world’s largest Internet user in 2006. (Forbes, 2006; Danwei, 2007)

Lenovo acquired IBM personal computing division in 2007 with funding from Texas Pacific Group and two other US private equity firms. This gave Lenovo one of the world’s leading brands for marketing its PCs. As of 2007, Lenovo was approximately 40% owned by public share holders, 42% owned by Legend Holdings (65% of which is owned by the Chinese government, 8% by IBM and 10% by Texas Pacific). (Wikipedia, IBM Website)

Analysis of the Environments that Created the Two

Both Infosys and Lenovo are leading global companies forged in the unique economic environments that their nations’ emerging economies presented. Legend is an interesting case as it combines some of the advantages and disadvantages of state ownership and participation. While many of their resources to start the company, including the intellectual property, came from the CAS, the government was also restrictive in issuing the necessary permits. Meanwhile, Infosys faced an environment where the government was largely a barrier in the form of corruption and bureaucracy. Their ability to overcome this by using a completely ethical framework turned into a major asset in winning business in the future with foreign companies.
Both Infosys and Lenovo navigated difficult financing environments with a combination of skill in the form of building cash flow positive businesses and early breaks that supplied them with precious capital. While both had initial public offerings in 1993, it is interesting to note Infosys had its IPO in Bombay and then later in the US, while Lenovo had its in Hong Kong, and to date has not listed on the Chinese exchange. This is indicative of how behind China’s financial system has historically been. Only recently has listing in China been considered a palatable alternative to more developed foreign exchanges.

Both utilized important cultural knowledge in order to navigate the business environments of their nations, an advantage over foreign multi-national companies that attempted to enter the market. This was especially important as, right around the same time in 1992, both companies faced increased competition from foreign companies due to changes in governmental regulations and policies. Both Infosys and Lenovo leveraged their cultural knowledge to stay at the head of the market despite intense competition.

Conclusion

Infosys and Legend/Lenovo were both uniquely entrepreneurial firms that used effective strategies and organizational designs to navigate the tricky business and financing environments of their countries. At the same time, they leveraged low production costs, strong local knowledge of distribution and the ability to cut through bureaucracy that held back many competitors. While they share some characteristics, this paper has also discussed some of the differences between them and the business environments in their respective nations. These include the funding environment, the ease of doing business internationally and the macroeconomic environments. Overall, both are remarkable companies with stories that are intrinsically tied to the business environments in which they were created.

Bibliography

“Infosys in India: Building a software giant in a corrupt environment”, Rawi Abdelal, Rafael di Tella, Prabakar Kothandaraman, 2007; Harvard Business School. (Abdelal et al. 2007)
“The Legend Computer Group Company,” in Qiwen Lu, China’s Leap into the Information Age (Oxford, 2000), Chapter 3 (pgs. 63-103)
“A Technology Legend in China”, Henry Chen, Harry Qin, Greg Ye, Zheng Yin and Michael Rukstad, 2001, Harvard Business School.
“Infosys Technologies,” Ashish Nanda and Thomas Delong, May 23, 2002; Harvard Business School. (HBS case 9-801-445)
“Infosys: Financing an Indian Software Start-up”, Walter Kummerle,, 2003; Harvard Business School.
Lenovo Group Investor Fact Sheet, http://www.pc.ibm.com/ww/lenovo/investor_factsheet.html
Wikipedia, Lenovo and Infosys Entries
“China Surpasses US in Internet Usage”, by Natalie Pace, Forbes Magazine; April 3, 2006.
http://www.forbes.com/2006/03/31/china-internet-usage-cx_nwp_0403china.html
“172 million Internet users in China”, by Maya Alexandri, Danwei, October 2007.
http://www.danwei.org/internet/chinas_number_of_netizens_cont.php

Friday, May 9, 2008

A quick overview of Basel II

This summary was written to provide a concise overview of Basel II for anyone researching the subject. If it is of use to you e-mail and comments are appreciated.

What is Basel II?

By Ted Chan and Victoria Slingerland

Basel II is a set of standards and best practices recommended by bank supervisors and central bankers from Basel Committee on Banking Supervision. The accords, named after the city in Switzerland where the committee meets sets the adequacy standards for a bank’s capital, thereby placing restrictions on the types of transactions and required operational standards in place. Basel II is an updated version of the original accord from 1988. The Basel Accords essentially are risk management guidelines for the banking industry established to enhance accountability and limit the amount of risk taken on by banks. Overall, Basel II enhances the reliability of the bank by helping to ensure it will not go out of business due to poor risk management. (Chaudhary et al., 2005, Wikipedia)

Basel I primarily focused on market and credit risk. Basel II differs in that it enhances the broadens the risks that banks need to monitor into a model that is more or less, requires enterprise risk management for a banking institution, as it broadens out from market and credit risk into operational risk. Overall, a much stronger framework is provided for regulators to monitor this, including a requirement far more detailed disclosures. Many describe the Basel II approach as being based on three pillars. The first is to limit market, credit and operational risk as related to the bank’s capital. The second ensures that they employ improved risk management practices and do not allow capital to be used as a substitute for inadequate risk management. The third pillar provides the regulatory tools for governments and central banks to monitor the first two pillars. These consist of required disclosures related to capital, balance sheet and risks. (Chaudhary et al., 2005)

The Basel Accords by themselves have little clout. The accords themselves set standards for regulations to be implemented by countries and regulatory zones. The standards can be adopted into banking law and are enforced to varying degrees in various locales. However, non-compliance by a regulatory locale implies that doing business within the financial system and capital markets in the region is riskier. The wealthier members of the G-10 (the 13 leading banking nations) will likely adopt them stringently. In other countries, with varying degrees of capital to invest into the require improvement and governance, the standards will vary.

Many banks have made or will require substantial investments in technology and personnel in order to meet Basel guidelines for risk measurement and new reporting standards to meet the end of 2006 deadlines that have been set. Some of the more complex models requiring more advanced approaches will need to be in place by the end of 2007. Both are fairly tight timeframes given the complexity of the accords. (Bank for International Settlements, 2004)


Bibliography:

“Basel II norms: Strength from three pillars”, by Dinesh Chaudhary, Paramdeep Singh and Pawan Prabhat; Business Line, February 13, 2005.

“Consensus achieived on Basel II proposals”, Bank for International Settlements website, May 11, 2004

Federal Reserve Online Basel II Website: http://www.federalreserve.gov/generalinfo/basel2/default.htm

Wikipedia Basel I entry: http://en.wikipedia.org/wiki/Basel_I

Wikipedia Basel II entry: http://en.wikipedia.org/wiki/Basel_II

Sunday, May 4, 2008

What's the best time to send a blast e-mail?

There are a lot of mixed ideas out there about what the best time to send an e-mail marketing promotion is. Personally, I hate sending out to a new list, but as long it's professionally done and people can opt out easily using something like Constant Contact, sometimes you have to do it. We're looking at this question about when to launch a campaign as I am working with a friend to launch a new website to foster creativity.

General trends that seem to come through from reading the literature:

-Tuesdays seems to be a good balance between getting read and for them to actually be able to spend some time on their site. There is the Tuesday through Thursday, 10AM to 2PM rule for sales side marketing campaigns. Given the timezones, I'd say 1PM or 2PM has to the be the right thing if you're trying to sell someone something. Creative engagement is a whole other matter though.

-Weekends have high clickthrough rates and people will spend more time on your site, but lower open rates. Makes sense, people aren't sitting there but have more time to open, look at your e-mail and check out your site.

-The worst time (verified by my time at a Fortune 500 financial services firm) is anytime around a long weekend. This company once blew out their return e-mail server because they got several million out of office replies sending something out right after a long weekend.

-The nature of your site is important. If it's work related, Tuesday afternoon is a better time than Saturday morning. But since we're launching a creative site, the weekend might be better as we are really seeking deep engagement and connection. Unfortunately, it's a pretty good bet that anything that doesn't get read until Monday morning is not going to get very much attention at that point.

Saturday, May 3, 2008

Getting some love from Warren

Warren was so accomodating about taking pictures with us. So here's a couple that will definitely get hung up in my office!

 
 
 
 

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Pictures from lunch with Warren Buffet

Here are few pics Jeremy Gilbert (MIT Sloan '08) took me during our lunch with Warren Buffett.

This was really quite an experience. I mainly chatted sports with him, I figured he'd answered enough questions on the day about efficient markets. Earlier he'd been talking about his relationship with Alex Rodriguez and Lebron James. He specifically discussed how he'd encourage A-Rod mend his relationship with the Yankees. There were lots of interesting tidbits in the conversation.

He ate what pretty much was a mayonnaise sandwich, and says he drinks five Cokes a day. That's a little scary, actually. You would never know he ate that unhealthy though. He's incredibly energetic.

 
 
 
 

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