The NOSE

Scaling Innovation: An Introduction to Prahalad & Krishnan's The New Age of Innovation.

Scale matters. But when and how? For a time the theory of capitalism rested on the belief that in a competitive process large-scale capitalism always beats out the smaller counterpart. Among the first to articulate this view was Marx: "The battle of competition is fought by the cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labour, and this again on the scale of production. Therefore, the large capitals beat the smaller." Although the intellectual antecedents of "giantism" can be found in Marx, the theory of capitalism in the West as represented by Schumpeter, Galbraith and others in the 1950s and 1960s, also proclaimed the invincibility of the large firm. The concentration and centralization of capital leads to economies of scale, which in turn leads to the highest levels of productivity growth. Schumpeter, for example, wrote in 1942 that "What we have got to accept is that (the large establishment or unit of control) has come to be the most powerful engine of progress."

The thesis of giantism has proven to be economically suspect and historically unsound. Indeed, the pendulum has swung so far the other way that today "innovation" has become synonymous with entrepreneurship and the latent ingenuity in small firms. According to today's conventional wisdom it's the entrepreneur and the small business owner that innovates. By contrast large firms are inherently bureaucratic and sclerotic. Clayton Christensen in The Innovator's Dilemma has made the further point (in Hegelian fashion) that the very logic that drives incumbent firms to success later generates the seed of self destruction. Is there no hope then for large firms?

Prahalad and Krishnan's The New Age of Innovation is not an apologia for large-scale capitalism. However, it is one of the few recent books on innovation that approaches the problem synoptically and comprehensively. It can be read by firms small or large as a primer on innovation strategy. Their starting point is the claim that "traditional sources of competitive advantage, such as access to capital, physical location, and raw materials or technology, will become table stakes. These factors are diminishing in their importance as sources of competitive advantage. Access to these factors is becoming easier."

Value creation and new competitive advantage derive from a set of factors which Prahalad and Krishnan portray pictorially as a house. The two pillars are labelled as "N=1" and "R=G". N=1 asserts that "value is based on unique, personalized co-created experiences of customers" while "R=G" means that successful firms will draw on, though not necessarily own, ideas, talents, and resources globally. In addition to these two pillars an innovation strategy integrates business processes, analytics, technology, and social architecture. The individual elements in Prahalad and Krishnan's model are not new but their synthesis is original. Large firms need not throw in the towel just yet.

Stay tuned for more on Prahalad and Krishnan.

Company to Watch

Stephen Walli has left Optaros for a startup, which is currently in stealth mode. Walli is one of the brighter stars of the software industry, particularly in his combined knowledge of technology, business strategy, and open source. According to Walli, "The new company is still very much under cover, but we will be delivering a web hosted solution for small business communities through a lean and simple browser interface.  We are Portland, OR based.  Think AJAX.  Think Ruby-on-Rails. Think open source software. Imagine turning certain bloated business software idioms on their collective head.  Imagine what trust and reputation really mean in a community of companies." Congratulations, Stephen. We expect to see great things.

Art of Innovation by Guy Kawasaki

I enjoyed Guy Kawasaki's speech (now available online) on the Art of Innovation. Guy is entertaining, irreverent, and insightful. Although "The Art of Innovation is a speech for any stage of company that is trying to create and marketing innovative products and services", anyone interested in innovation will profit by it.

Here is one gem: Guy's 10/20/30 rule for presentations to angel investors.  10 slides/20 minutes/30 point font. That's good advice for ANY presentation.

Trials and Tribulations of an Entrepreneur

Mark Cuban's Success Motivation - Redux series is well worth reading. We also look forward to the movie.

Goodbye to Venture Capital

Howard Anderson, big time venture capitalist and William Porter Distinguished Lecturer at MIT's Sloan School of Management, is saying good-bye to the industry. (Anderson is Senior Managing Director of the Cambridge-based YankeeTek Ventures. Its home page is quite amusing in the light of Anderson's announcement. It deserves an award for simplicity and directness.)

His article in Technology Review provides a very interesting insight into the technology sector, market prospects , and how venture capitalists think. Here's a taste:

 

Japanese Garden, Portland

"VCs actually like cyclical markets; we can buy in cheaply and wait for exuberance to bail us out. Traditionally, we knew that if we picked the right sector we could make 10 times our money. In fact, we knew if we picked the best two or three companies in that sector, we could make 50 times our money--but you get my point. But those days are, regrettably, over. Here's why: it takes about $30 million to get a startup software company to break even--and even great software companies rarely grow more than 100 percent a year. In irrational times, a software company with $30 million in sales would have been worth $180 million, or 600 percent of a VC's investment. Which is good, but not great. Unfortunately, in rational times, the company would be worth $47 million to the investors, or only 157 percent of their investment. But that's over five years! Per year, it's a return of only 11 percent--and that's for a winner. Remember: in venture funds, only 20 percent of investments are winners. Forty percent are in the middle, 20 percent are losers, and another 20 percent are write-offs."