Many people believe that we are at or approaching another technology revolution or paradigm shift similar to the steam engine or the transistor. Candidates for the technology to mark the next paradigm shift are artificial intelligence (AI), Internet-of-Things (IOT), nanotechnology or perhaps a less publicized technology.
The concept of a paradigm shift was first introduced by Immanuel Kant, further developed by Thomas Kuhn and recently explored in detail by Carlota Perez. Perez has done much analysis of the cycle of a paradigm shift, where the last stage is the widespread introduction of the technology in many applications. At this stage the technology risk is lower and the greatest amounts of capital are attracted and invested.
Yesterday Lyft, the car sharing service, announced a $500 million investment from General Motors. The blog AVC, where the principals are investors in Lyft, announced that the money is to "develop a network of self-driving cars". I think this Lyft investment will be looked back on as the first big investment in Perez's last stage of a paradigm shift to AI everywhere.
On the off chance that you are pondering your own sanity over a more leisurely holiday period, I would like to tell you that you are not alone in considering such matters. I have started a new book, "Genius At Play: The Curious Mind of John Horton Conway" by Siobhan Roberts.
This is a great book for holiday reading if you enjoy:
Reading about crazy eccentric people
Learning how a genius mathematician thinks about problems
Wrestling with the relationship between philosophy, mathematics and physics
Don't be afraid. Very few equations. Excerpt follows.
"So I had this great idea of using the notion of “double parallax” to see 4 dimensions. Your left eye’s picture and your right eye’s picture theoretically could differ not only by horizontal parallax but also by vertical parallax. That makes 4 positions, which would give your eyes the input they need to see in 4 dimensions. And what generated the vertical parallax was the helmet. I made it out of a crash helmet, cut various bits off, bolted on a visor, and put these army surplus periscopes in place. One of them moved my left eye diagonally downward to the middle of my chin, and the other moved my right eye diagonally up to the middle of my forehead. The net effect was that my eyes were displaced vertically, and to rather more than the usual horizontal displacement, about twice as much."
Roberts, Siobhan (2015-07-14). Genius At Play: The Curious Mind of John Horton Conway (Kindle Locations 1246-1253). Bloomsbury Publishing. Kindle Edition.
This post reflects some of my thinking for a new book on a framework to identify the large market opportunities that have consistently repeated themselves over the last 4000 years.
"The last 40 years have seen an explosive adoption of new technologies (social media, telecom, life sciences, etc.) and the emergence of new industries, markets and customers. Not only are the number of new technologies and entrants growing, but also increasing is the rate at which technology is disrupting existing companies. As a result, while companies are facing continuous disruption, current corporate organizational strategies and structures have failed to keep pace with the rapid pace of innovation."
Much of the article is devoted to the evolution of organization structure as technology fostered changes in society. Small family firms evolved into specialized corporations that then became geographically disbursed to serve multiple markets. This very interesting history supports Simoudis' point that corporate organizations change in both strategy and structure. What Simoudis does not explain is why these organizational changes take place. The answer lies in the amount of information that an organization needs to process.
Has information increased or decreased since the Industrial Revolution began around 1770? Of course, the answer is that information has increased dramatically and since the 1960s the rate of increase has accelerated. Ronald Coase the Nobel Laureate helps us to understand why increased information causes organizational change. Coase showed that firms were organized to reduce transaction costs. Firms internalized functions when it was economically beneficial compared with buying the service. This insight defined the line between the firm and the market. Now if firms are organized to efficiently use external resources, one might logically expect that firms also organize to use their internal resources in the most efficient way. What are the internal resources? Coase described these resources as legal rights.Effectively, what Coase meant by rights is information--knowledge in workers, contracts, intellectual property, business processes, business models, etc. As JR Galbraith makes clear in "Organizational Design Information Processing”, organization form and structure is updated to process information more efficiently. This, of course, is the same behavior that complexity theory would predict. Organisms are constantly trying to organize information in order to reduce the amount of energy required for search and organizing.
proposing one way to look at the problem. The five key takeaways from Brainspace about how corporations should deal with information (in the future) are:
Identify subject matter experts
Information will be captured for reuse
Access to information in context creates value
Open, collaborative workflows and processes will be required
Leaders need to gain a real-time view into the knowledge network
Brainspace identifies correctly the need for a corporation to totally redefine how they think about information and how they create it and manage it to achieve knowledge (meaning derived from information). The most important point is No. 4, where Brainspace tries to articulate the new role of the individual employee. However I think that words like collaboration, workflow and processes, Twentieth Century words, do not accurately capture the new environment. I think ants, as famous in complexity theory as ducks, may be a better way to describe this new organization. Individual ants, with no directions or orders seek out food sources, independently capture information about food and report back (through pheromone trails), which may trigger exploration by additional ants who also report back until sufficient information through pheromone confirms a good food source. Workers in the future will capture information that will be available to everyone in an organization, which will prompt various other employees to investigate.. some in more detail. A significant portion of the information will be in real time, captured by IOT sensors.
I expect that corporations in the future will:
Assign a portion of each employee day to information management--search, analysis and curation--in order to keep up the larger volumes of constantly changing information
Use some form of Evernote designed as an enterprise-wide app, with equal attention to the future and current environment
Use AI to organize and re-organize information in enterprise systems, based in part on the results from individual employees doing information management
Adopt more analytics for decision making, but realize that information capture to feed the analytics is the priority
I think that when artificial intelligence can re-organizes the information for a company’s employees to better reflect their evolving understanding of a subject, then organizations will look like ant colonies with a large number of integrated but autonomous information gathers. Some might call this holacracy, but I think "ant colonies" better captures the idea.
Part of the benefit of teaching is what you learn from the students. Yesterday in class one of my students made what I thought was an interesting observation. More and more companies are disrupting themselves. He said that the ability to disrupt your own company was a competitive advantage. In other words, consistently disrupting your own company is a unique input or expertise that satisfies the conditions for a competitive advantage.
For those who forget how to define a competitive advantage, the definition is below.
Valuable--has significant value to the customer
Rare--not common
Inimitable--not copiable
Not Substitutable--there is no substitute
The expertise of disrupting oneself is similar to the expertise of designing airplanes for quick rebuilding. This airplane manufacturer can crash, rebuild and test again faster than their competitors. This expertise enables them to get to market faster. The self-disruptor is constantly identifying a smaller feature set that satisfies an unserved portion of the market. The ability to see the unserved need and match it with a feature set repeatedly becomes a competitive advantage.
The more I think about this idea the more I like it. Imagine that you are running a food company. It might be easier to identify new products looking for ways to disrupt existing products rather than the more traditional ways used in the food industry.
One of the most challenging issues in corporate management is the training, development and support of employees. The current environment increases the challenges for the reasons listed below.
The change from hierarchical to flatter organizations places more responsibility on lower level employees to take decisions and act
Flatter organizations tend to self-organize, making it less clear who is responsible for staff development
Outsourced employees, project staff and contractors may require development to remain a viable alternative to employees
The accelerating growth in relevant information and data finds employees needing a whole new tool set to stay current and informed
In considering the development of a new approach to corporate staff development and support, four factors need to be considered.
Standards for software, apps, dashboards and data are not set by corporate IT but rather by Uber, Dropbox, Medium and Apple
Corporate Strategic Goals and Objectives
I am sure most F500 corporate CEOs are confident that the company strategy is well articulated. Now imagine that we are onboarding a graphic designer contractor to a project. Imagine the contractor is from Tajikistan, a Moslem woman and English is her fourth language. Now how confident are we about the clarity of the strategy given the social, cultural and language issues? How confident are we that our information and support systems have been designed to recognize the particular needs of this woman contractor?
Regulatory Requirements
Since the 2008 financial crisis, U.S. federal regulators have scrutinized large corporations. Scrutiny with respect to risk exposures increased after the Snowden affair of 2014. Such events of extreme consequence will probably increase. Therefore, it becomes incumbent upon corporations to keep their staff abreast of regulatory requirements but also the philosophy and concepts underlying the regulation. I hope the woman contractor from Tajikistan is familiar with, for example, FCPA regulations.
Environment
The pace and scope of change has increased as computing power has increased, whether we examine the actual change or the pace at which new information circulates in world markets through informal communication systems (such as Twitter or WhatsApp). This complexity strains employee’s ability to stay current and understand new issues sufficiently to develop proactive strategies.
Standards for Software, etc
Employees and third party workers all over the world have become accustomed to beautiful interfaces for a large feature set of necessary information all on their phone. Formats include You Tube videos, Slideshare presentations, e-books, PDFs, MOOCs and 100 other formats and delivery mechanisms. On any subject you can get information in the format you prefer. Few corporations have yet reached this level on proprietary applications let alone their information archives (if they even exist).
Today the AVC blog has a story about their portfolio company Kickstarter joining President Obama and the UN to fund raise for Middle East refugee relief. This is an interesting "partnership" for several reasons:
The U.S. Government believes that significant capital can be raised for traditional government activities through private sector crowd funding.
The Government believes that a private sector crowd funding is faster and less expensive than a legislative effort
My takeaways from this:
The Obama presidency does not believe they can pass refugee fundraising legislature and have opted to use their expertise in social media instead. Effectively the President has become a moral authority like the Pope without the resources to act.
This initiative could have happened without the U.S. Government and the UN involved. If Kickstarter had initiated the campaign they could have chosen their own execution partners. I hope Kickstarter learns how to do these campaigns without government and multilateral partners. The challenge is in the execution in country and picking the right partners.
This example is further proof that the private sector can disrupt government and reduce its scope.
Since WW II corporations in the U.S. have gone through several "periods" in which the nature of the corporation was redefined. First we had simple companies that produced mostly industrial products and the bare consumer necessities.
The first noteworthy change was the conglomerate period in the 1960s where acquisitions of any kind added value. High PE (price-earnings multiple) companies purchased low PE companies but the added earnings plus cost savings were erroneously valued by the market at the higher PE ratio.
Then in the 1980s the first private equity firms appeared to do LBOs (leveraged buyouts). In the early days the PE firms were able to buy undervalued companies, strip out and sell unnecessary assets and earn a nice profit selling the remaining company.
As the undervalued assets disappeared, the private equity firms switched to doing rollups. Buy a platform company in an industry and then buy multiple companies in the same industry. This strategy produced scale, economies of scale and administrative cost savings.
Today we see a trend toward companies themselves (with no help from Wall Street) outsourcing operations to reduce costs and focus on the areas that are critical to creating value for the customer. More on this theme in this article from Danielmiessler.Com, "The Future of Renting vs. Buying".
What all of these examples make clear is that the concept of a corporation changes to address the opportunities to extract additional value. As Ronald Coase made clear in his Nobel Prize winning work, corporations are formed as a means to reduce (transaction) costs. While this logic was originally applied to understand integration efforts in corporations, starting with the LBO phenomenon we see corporations basically decoupling functions and assets to lower costs. This trend toward decoupling will only accelerate in the years ahead as we become comfortable with using IT to manage and control a wider and wider range of remote third party functions.
NYU Professor Aswath Damodaran is a leading academic who specializes in the valuation of stocks, companies, goats and any other asset that is not an option. The Professor's blog, Musings on Markets, is a pleasure to read, very well reasoned and very educational for those interested in things financial.
Recently the Professor wrote an article, "Beijing Blunders: Bull in a China Shop!". He begins the article by discussing how it is not trivial for him to criticize China. China has the assets and wherewithal to significantly disrupt the professor's life. I commend the professor for writing the article in which he pulled no punches. More professors should consider such articles if and when warranted.
In eight years of blogging I rarely refer to a person as "Professor", although I frequently reference academics. It is a sign of my continuing respect for Professor Damodaran.
Stanford Business has a new article out this week, "Exploring the Ethics Behind Self-Driving Cars". It is a great article if you teach ethics in an academic setting, but the more important point is to put us all on notice. There are many new issues we need to address as artificial intelligence is added to our lives.
The article frames one conundrum. Should the car be programmed to protect your life or should it also consider the lives of pedestrians and people in other cars. Personally I think we should separate the car from the software. I can buy my car from BMW but the AI software comes from Google or Apple or MIT Automotive. Yes, there may be some issues similar to using Windows on so many different computers, but I could pick the moral position I want. No General Motors ethics for me. (BTW, whose software would you trust more--General Motors or Google or Apple)
By chance I talked to some industry people on this topic last week. They say that their analysis shows that driverless cars will have fewer accidents than human drivers. Maybe, as soon as we eliminate all human drivers we will not have so many ethical questions and the professors at Stanford can go back to thinking about Resource-based Theory.
I have been reading a lot this summer on complexity, networks and related themes. One thing that becomes clear is that networks form to the extent that they are cost-benefit justified. Anything that adds to cost (distance, trust, search cost, boundaries) tends to retard the development of a network. While there are some benefits to government, government can frequently be a cost that slows network formation.
While everyone heralds Uber as a great example of sharing, I prefer to characterize it as a disruptor in a regulated industry. I am excited to see government regulated industries disrupted. Such disruption will lower the cost of "networks" and doing business.
This article at Marginal Revolution, "Can economists justify pre-market exclusion for pharmaceuticals?", challenges some traditional roles for government in drug approvals, home mortgages and Exim Bank. I think this research area is very interesting. I think it further initiates a dialogue about the role of government. I have no doubt that government's scale and scope will be reduced as technology allows us to do things more cheaply than relying on government, but we need to start a real dialogue about the subject and academia is one place to start.
I have stopped doing panel discussions, but I am happy to be a moderator if the panelists are interesting. In the last two weeks I have watched several panels on very interesting subjects with great panelists that completely flopped. They all flopped because of the moderators. If you are moderating a panel my advice would include:
Research the subject of the panel well and invest equal time to understand the careers and thinking of the panelists
Refrain from introducing your own opinions. Nobody comes for the moderator
Do not under any circumstances argue with the panelists
If you do not have an insightful followup question, move on to the next planned question
Someone needs to provide a free training program for moderators.
This video on Big Think describes corporate learning at IBM. Corporate learning is the company-wide method to provide lifelong learning to IBM employees. The program covers mostly current topics in IT but, of course, that is IBM's domain. Format appears to be a MOOC.
Most interesting part of the story is that the CEO established the program and teaches a course once a month. Leadership from the top makes the commitment and objective obvious.
I think that more formalized, high value corporate training will become a big business opportunity. The business environment is becoming more complicated as AI and Big Data are more integrated into day-to-day business. Companies are increasingly narrowing the range of their business expertise partly by relying on third party providers, which will require companies to be extremely vigilant in their area of expertise. Lastly, knowledge is doubling every 13 months, which means there is 8 times more knowledge every three years. Such a scale of growth in knowledge puts pressure on companies to help their employees to stay current.
This quote in a story in Fast Company caught my attention:
"...a system in which a program can be written to find an answer—or to execute a smart contract that can buy something, sell something, or do something. In aggregate, a group of smart contracts could run what is known in Ethereum-speak as a "decentralized autonomous organization" (DAO) or a "distributed autonomous corporation" (DAC)—in other words, a corporation distilled to its most basic tasks, and operated by little more than code and the logic of if this, then that." (emphasis added) Companies will have a single asset, a code base using AI, that will enter into transactions with independent service provides to create, deliver and capture value.
Perhaps this novel idea caught my attention because I had spent the weekend reading about datafication, which is explained in a study by Ericsson "The Impact of Datafication on Strategic Landscapes". Digitalisation is the evolution of IT starting in 1950 which brought us apps, mobile devices and a focus on IT for productivity improvement. Datafication is the new approach to IT which recognizes the changes coming in IT from the large number of physical objects capturing or generating data. The differences in digitisation and datafication (from the Ericsson study) are summarized below.
Now, as every aspiring entrepreneur knows, one must understand the customer and their problem to successfully start a new business concept. The question one should be considering is whether datafication provides sufficient information for the code based AI company to successfully identify a large need and develop a solution. Ericsson believes the answer is yes and the data source will probably be your cell phone, which captures and generates data on your entire life. When a company with no humans is analyzing data about you, it brings privacy issues to a whole new level.
Maybe the solution to the problem of the morality of capitalism is to replace the human managed companies with "no humans" companies. Might be more socially aware :)
Instead of robot challenges every weekend, maybe we should have challenges for best code to autonomously operate a company.
This quote from FA Hayek on the Cafe Hayek blog reminds me of a book that I recommend highly.
Hayek quote from 1954 essay “History and Politics”:
"The complexity of social events in particular is such that, without the tools of analysis which a systematic theory provides, one is almost bound to misinterpret them; and those who eschew the conscious use of an explicit and tested logical argument usually merely become the victims of the popular beliefs of their time."
The book I recommend is Complexity and the Economy by W. Brian Arthur. Insightful examination of economics in a way that I have not seen before. Amongst other interesting observations, he advocates that technology precedes the need(s) that it satisfies. The discussion of just the concept of "formation" within economics makes the book worthwhile.
Found the book through a friend's FB post about meeting Arthur at Santa Fe Institute.
I have become something of a collector of different models of social entrepreneurship. For the purposes of being accepted as an example of a different model of social entrepreneurship, the company must be for-profit and have a unique way of delivering measurable social impact. The examples I have collected are not necessarily the first such companies. The only distinction I make is I do not accept CSR projects.
Two examples recently caught my eye:
The Miami Heraldreports that Carnival Cruise Lines is forming a new division/company where the onshore excursions will be to work with local people on socially beneficial projects (instead of going off to see sharks or polar bears). If Carnival were to develop multiple ships and cruises for this purpose I would applaud them for their social impact. If they need a local social entrepreneurship professor to help them plan their impact and projects, please let me know.
Norton Sound Corporation is one of many native-owned corporations established for the benefit of indigenous people at the time of Alaska statehood. Norton Sound operates Norton Sound Seafood and Norton Sound Seafood Restaurants. All of the seafood is caught by members of a particular indigenous group near Nome, Alaska. Sale of the seafood to the corporation provides much of the livelihood for the natives. The creation of a branded product and metropolitan outlets for a product provided by indigenous people is a model I like.
Wonder how much seafood, if any, Carnival buys from Norton Sound or any other native corporation in Alaska. The new division should consider such questions.
I believe that social entrepreneurship is a temporary form of entrepreneurship and that over time we will no longer need the adjective "social" to differentiate a form of entrepreneurship. With education companies will come to serve a wider range of stakeholders and provide more "social" benefits. Should such a realization be achieved, perhaps that will quiet the critics of capitalism. Such critics claim that capitalism is immoral.
The Institute of Economic Affairs has a well written defense of the morality of capitalism in "Free market capitalism and morality". The article has some excellent citations from Adam Smith's writings. If I could figure out the legal issues, this is the first article in eight years of writing this blog where I would just reprint the article.
Today Nancy Dahlberg has a nice recap at Starting Gate of the Miami Herald Business Plan Challenge, which I judged. Noteworthy was this year's winner in the high school category, Teenography. I very much like the idea of teaching entrepreneurship to high school and junior high school students--not checkbook management or accounting, but real business concept development and go to market strategies.
Teenography operates an exchange/marketplace/platform (pick the word you like) that enables young (high school) photographers to offer their services to clients in need of photos for events, marketing materials, etc. Average charge rate is $40/hour compared to professionals who charge $100/ hour in South Florida. Why the difference of $60/hour. You might say professionals versus amateurs but the real reason is what economists call asymmetry of information. Information on photographers used to be difficult to find and incomplete, the asymmetry, because there was no easy way to find out about amateur photographers. When information on amateurs becomes available through Teenography and more complete information is the norm, the price per hour of photographic services drops by $60/hour. Reducing the premium created by the asymmetry represents the business opportunity.
In markets where there is an asymmetry of information, there are two new business development strategies:
Exploit the asymmetry and earn abnormal returns (hospitals), or
Eliminate the asymmetry, e.g. Teenography, Etsy, CarFax
As is obvious, the Internet and ubiquitous information make it possible to profitably eliminate the asymmetry. A trend I see emerging is for such exchanges to bridge service providers in developing countries with clients in developed countries. One example of this is Behance, which enables third world graphic artists, web developers and designers to showcase their work to the world. The site allows for the service provider to be contacted but not for a contract to be consummated...yet. Customer service from India is not so far from the exchange model nor is artesans in Africa posting their wares on a web-based exchange where socially motivated buyers can pick what they want to purchase.
This business model of the exchange that bridges the developed and developing world ('bridging marketplaces") I think will become very common. The timing is excellent because low skill jobs for immigrants in the U.S. are being taken over by robots. Fruit picking and nursery work is now done by robots, according to this post in Marginal Revolution. If there are no jobs in the U.S. to attract immigrants, then I hope these workers find bridging marketplaces that provide local employment.
If someone had good open source exchange software, one group of socially motivated people could focus to organize the local service providers and another socially motivated group could focus on marketing the exchange products or services. A little imagination and we crowd source to fund the marketing.
For more on the relationship between developed and developing markets, read this excellent article from the Washington Post, The Great Unraveling of Globalization.
A friend is promoting a boating safety course this weekend sponsored by the US Coast Guard Auxiliary and the Monica Bruguera Foundation. As part of the last push to boost attendance, my friend put up a post on Facebook. Facebook offered her three alternatives to share the post:
Friends
Family
Anyone on Facebook who lives in our community (which has a unique zip code)
Maybe everybody knows about this third option, but I just learned about it and thought it was a great way to promote community events.
Send me a Tweet (@rhhfla) and I will provide more details about the free class.
In the period 1950-1980 U.S. companies built an infrastructure to provide the consumer lifestyle we all know and appreciate. With the advent of computers and globalization, in the period 1981-2010 financiers de-constructed the infrastructure through leveraged buyouts, arbitrage, derivatives and specialized finance to realize vast amounts of untapped or dormant value. As the opportunities became more scarce, leverage was used to improve returns.
A poster child for this second period of "financial engineering" was GE Capital, who dominated many financial services for businesses. Not only did they provide financing at better terms than commercial banks to finance purchases from other GE divisions, but they also pioneered "new" products such as private label credit cards for large retailers.
The NY Times reported today that GE Capital is completing the tasks to basically wind down this division of GE. Many blame the financial crisis of 2007-2008 for the demise of GE Capital. Others would point the finger at increased regulation post crisis. I think GE Capital got swept up in the craziness of the ten years preceding the crisis and lacked the financial controls to properly manage the business. Of course, this is the same reason AIG, Lehman Brothers, Merrill Lynch....all failed in one way or another. Financial controls for financial operations appears to be an area where we still have much to learn. To just write the errors off to greed is to miss the opportunity to learn.
"Wednesday marked a historic milestone in the future of early stage investment and funding for innovation. Roughly 60 days from now, over 200 million Americans will have the option to be angel investors." LawGives.net March 27, 2015
Several Presidents have promoted home ownership despite no constitutional requirement. Most notable was Bill Clinton and we know how well that turned out. Now the SEC has changed the law to permit greater participation in equity crowd funding. Some estimate that 200 million Americans are now eligible to invest. The law was changed ostensibly to permit a larger number of investors to buy shares early in sexy pre-IPO companies like Google, Amazon and Facebook. Probably a popular populous idea. Again, there is no constitutional requirement for such investment rights.
The question I would ask is how many of my fellow Americans are financially literate enough to evaluate early stage companies. Based on returns, only about 10 percent of venture capitalists generate returns consistent with the risk and these are full-time professional investors. On a good day maybe 5 percent of Americans or 10 million of the 200 million are sufficiently literate financially to pick startups. Looks like we are following in the footsteps of Bill Clinton and about to start building toward a huge snafu again, promoting investments that were not prudent for the investors.
I don't object to permitting individual investment in early stage companies or crowd funding. I just do not believe it is the government's role to promote it. That's why I keep referencing the constitution. Looks to me that every time the government starts a populous investment program not required by the constitution, we have huge financial problems.
What could be the the crisis? My biggest concern is the huge amounts of money that normally go into the stock market or bank deposits could now be tied up in illiquid equity investments of uncertain value. Every investor has the right to make their own decisions. I just do not like the government promoting investments that are imprudent for many.
