Incumbent Capitalism

This is one of my big beefs with the way we think about capitalism in this country: We fundamentally support what I call incumbency capitalism. We don’t support innovation capitalism. What’s the difference? Every rule around tax credits in the oil industry is set up by, and influenced by, the lobbyist from the oil industry. The royalty rates aren’t free auctions for offshore drilling; they are influenced by the oil industry. Depreciation policy is incumbency policy meant to benefit large capital expenditures instead of R&D investments. So, we can easily change a few of the rules, encourage more R&D and maybe less capital investment or other things. And almost all policy, because it is influenced by incumbents—and not just in oil and gas, but in nuclear, in solar, in wind—is influenced and shaped by incumbents. And I call that incumbency capitalism.”

Vinod Khosla, Managing Partner, Khosla Ventures

China manufacturing

A couple of fascinating posts on Shenzen small manufacturing.

Significantly, they do not just produce copycat phones. They make original design phones as well, as documented in this PDF (it is in Chinese, but the pictures are cool; the collage above is ganked from the PDF). These original phones integrate wacky features like 7.1 stereo sound, dual SIM cards, a functional cigarette holder, a high-zoom lens, or a built-in UV LED for counterfeit money detection. Their ability to not just copy, but to innovate and riff off of designs is very significant. They are doing to hardware what the web did for rip/mix/burn or mashup compilations. The Ferrari toy car meets mobile phone, or the watch mixed with a phone (complete with camera!) are good examples of mashup: they are not a copies of any single idea but they mix IP from multiple sources to create a new heterogeneous composition, such that the original source material is still distinctly recognizable in the final product. Also, like many web mashups, the final result might seem nonsensical to a mass-market (like the Ferrari phone) but extremely relevant to a select long-tail market. Interestingly, the shanzhai employ a concept called the “open BOM” — they share their bill of materials and other design materials with each other, and they share any improvements made; these rules are policed by community word-of-mouth, to the extent that if someone is found cheating they are ostracized by the shanzhai ecosystem.

More here where an excellent point is made about the Emilia-Romagna area in Italy. One of many things that drives me to despair about economists is that their impoverished model of how things work cannot distinguish between $x for investment in a computer system designer in a place like Austin where you can get someone to make you a small run of boards in a week, and the same dollar investment in a place where you cannot.

Also see the Strategy+Business article

Ms. Yang, a Beijing office worker, shows off her new mobile phone to her co-workers. It boasts all the features of a typical handset — touch screen, camera, MP3 and video players — but it offers a lot more besides. Shake it, and its wallpaper changes automatically. Dial it, and lights on the sides flash in sync with the most popular ringtones. This phone is not a Nokia, a Motorola, or a Samsung. In fact, it has no brand name at all, and it costs just US$70 (480 yuan), less than a fifth the price of similar branded products. This is what is called a shan zhai model in China.

unnovation

This is a brilliant idea.

Most innovation, well, isn’t: it is “unnovation,” or innovation that fails to create authentic, meaningful value. The biggest stumbling block to innovation is unnovation: most companies are too busy unnovating to ever learn how to truly innovate.

In the race to innovate, most organizations forget a simple but fundamental economic truth. A new process, product, service, business design, or strategy can only be described as an innovation if it results in (or is the result of) authentic, durable economic gains.

Unfortunately, much of what our economy produces today isn’t innovative — it’s unnovative. The evidence is hard to dispute: we merely need to note how deep the global decline is, how consistently 20th Century business fails to do stuff that matters — or just how many industries are caught simultaneously in deep crisis.

Here are some examples of unnovation.

The Hummer was a product unnovation, which destroyed value for both society and Detroit.

CDOs were a financial unnovation, that crippled the financial system, and have cost everyone hundreds of billions.

Integrating into auto finance was a business design unnovation for Detroit — one which diluted and sapped the incentives to make authentically innovative cars.

In our field, innovation requires investment and time. But “unnovation”! That’s a different story.

end to end design versus BOM design

Grossly simplifying, some products are Bill of Materials (BOM) products and some are Designed products. BOM products come to market via a process of generating a parts list and then integrating. In place of designers, BOM products have buyers and integrators. In place of innovation, BOM products have standards. The standards are preferably “industry standards” produced by consortia of companies that manufacture or distribute the product. Vendors compete on price and “alliance” to be allowed to sell parts to the integrators. Buyers work in a bureaucratic system in which specialists oversee acquisition of parts and the product as a whole is viewed primarily in terms of the sum of parts costs. Usually there are a small number of large integrators who act as the gateway to the market.

All the recent progress in cell phone handsets has come from companies that defied the BOM process. Instead of trying to sell items into the “stack”, RIM and Apple both have been able to imagine the handset as a complete product and innovate. Google is also changing the game by bearing down on what services can be delivered over a mobile device. These companies are in the business of creating products for end users and not in the business of selling parts to buyers of components. If you create products, BOM issues don’t go away, but they do not dominate.

The BOM process can dominate even in what appear to be more open markets. In a previous note, I discussed Dell’s efforts to sell against Apple to the people and businesses found at SXSW. Even though, as Jay Pinkert points out, Dell has improved design for cases, it labors under a disadvantage against Apple, because Apple can do end-to-end product design and Dell is forced to live at least in part in the BOM process world. Apple is not only designing the case, they control the operating system, the windowing environment, the middleware, and they can strongly influence and package application software. So Apple can look at what a conference organizer or musician wants or maybe what they will want once someone shows it to them, and try to design a product that will be compelling in totality. A company like Dell is constrained to delivering what is ultimately just a vehicle for vanilla Windows (or Linux) – a component of a stack. While the packaging can be improved, they cannot reach the customer in the same way that Apple can. Musicians and conference organizers and marketing agents want to have an aesthetically pleasing communications/graphics design machine or email/composing system or presentation device or some combination of these. None of them demand Vista or OS/10 or an intel processor or any of the technical parts. Of course, the traditional downfall of companies like Apple is that they grow an internal BOM process that transforms their own engineering staff into integrators and parts vendors.