Monday, July 2, 2007

Techonomic Market Crises and Recommendations

If you could kick the person in the pants responsible for most of your trouble, you
wouldn’t sit for a month.
— Teddy Roosevelt
TECHONOMICS NATURAL SELECTION
MECHANISM: COMPETITION
The relentless march of knowledge in applied form (technology) has always been
the force behind human productivity. In product after product, service after service,
endeavor after endeavor, and market after market, continuous improvement in technology
and its expanding deployment have resulted in more output with less human
labor and material resource. Techonomic progress has reshaped the fundamental
productivity of organizations on all levels throughout history.
In view of the applicability of techonomics to so many fields, crossing time and
national boundaries, and with the rate of techonomic change accelerating, could
there possibly be any current markets where techonomic forces are not working?
Can a market defy techonomic trends? Unfortunately, some markets and endeavors
not only defy but reverse them. They can do this only when a powerful external
force is exerted and maintained on the marketplace, however. And the price is high.
As the technology gets better, the economic cost to provide endeavors is increasing,
because these organizations are failing to become more productive.
Under normal circumstances, the techonomic theory of organizational evolution
would anticipate that the competitive market, the natural selection mechanism, would
eliminate negative productivity trends. Remember, each key element in Darwin’s
theory of organic evolution has an analogous element in techonomic theory. In the
competitive economic arena, it is techonomic intelligence that gives some organizations
the edge over others and results in their survival and growth, just as in the
natural environment, it is some favorable characteristic — better eyesight, coloration,
speed, etc. — that gives an animal the competitive edge and “selects” it for survival,
growth, and reproductive success.
Competition in an open market, where techonomic forces can operate freely, is
the selection mechanism that favors productive organizations and promotes their
health and growth. Fundamentally, techonomic theory posits that technology advance
results in productivity gain, thereby providing greater output for less cost. This theory
also anticipates an inverse result when free economic competition is artificially
constrained.
In three major U.S. markets — energy, healthcare, and education — techonomic
trends are operating in reverse, resulting in an economic decline headed to crisis.
The missing element in each of these markets is competition. Each of these troubled
markets exhibits a different way of diminishing the corrective force of competitiveness,
but the external force perpetuating the artificial market originates from the
same source — government:

The energy market:
Domestic competition from nearly all energy
sources has been stymied by unilaterally expensive environmental regulations.
These regulations render domestic exploration and production
economically unjustifiable relative to international sources.

The healthcare market:
By removal of personal responsibility within a
multilayer system of insurers, providers, litigators, beneficiaries, and suppliers,
competition has been diminished. The motivation for efficiency,
beginning with the individual, has been eliminated because “someone
else” pays the bills.

The educational system:
Monopoly leads to waste and inefficiency. The
public education system is a monopoly with a firm agenda to maintain a
perception of adequacy.
In this chapter we shall look at the negative trends in each of these markets, and
we shall consider specific suggestions for reintroducing competition into these key
markets. Due to the size and importance of these three markets, strength within them
is actually vital for sustaining the competitiveness and health of our remaining
economy. However, we shall no doubt have to suffer the ill effects of these negative
trends for a while longer before the will of the American people requires its government
to free these markets.
Since techonomic trends are active in the global economy, performance of these
U.S. markets must be viewed in terms of contemporary world markets. Techonomics
predicts that U.S. trends in these markets are very likely to be corrected in reaction
to a reduced economic living standard in our country relative to the world. However,
if the nation does not act decisively to address the major noncompetitive markets
producing these combined trends, then
more efficient and effective nations tempered
by the competitive fire of the international marketplace will economically
prevail.
In addition to competition, the free market attracts capital, bringing resources
to productive causes. Capital formation, the act of acquiring monetary resources for
the execution of a productive endeavor, is increasingly more important as technology
advances. The acquisition of capital for an endeavor demands a marketplace wherein
a reasonable return is possible (not guaranteed, but at least possible). It has been
aptly said that entrepreneurs are not risk takers; they are calculated risk takers. If
an opportunity is going to attract the capital it needs to grow, there must be a
reasonable governmental, economic, and cultural system in place that respects the

importance of capital. Investments must have the opportunity to bear fruit. If such
conditions do not exist, then elevated capital risk demands payback rates and shortened
time frames that reduce or eliminate the financial foundation needed to proceed.
The current situation in China is a clear example. In recent years, China has
systematically opened up trade and free market practices on its borders. Figure 8.1
shows the growth in trade between the U.S. and China over the past 20 years.
1
Capital formation for China has had to come from revenues generated from
product sales and from corporate partnerships with foreign firms willing to bear
the risk of unknown capital markets and government policies.
Conversations with
leading international equities brokers have confirmed my conviction that investment
in equities listed on Chinese exchanges remains a very risky endeavor. The high risk
is there mostly because of the uncharted performance of their equities regulatory
oversight system. China’s transformation will be slower as a result, but it will still
progress because of free trade and free markets around the world seeking low-cost
goods, wherever they can be found.
The techonomic productivity (output/cost) of manufacturing in China is increasing
rapidly as China embraces the competitive world marketplace. By contrast, the
techonomic productivity of manufacture in the U.S. is on the decline because we
are burdened with decreasing performance in the three influential markets: energy,
healthcare, and education.
Techonomics
has already considered aspects of these
markets both historically and recently, but this chapter offers analysis to pinpoint
the means by which marketplace competition was removed and to suggest corrective
measures.
To restore competition, it is essential to understand the means by which
it has been constrained.

ENTITLEMENT

What economic protectionism does to organizational competitiveness, cultural entitlement
does to individual initiative and character development. Note this cycle:
improved standards of living come from greater productivity. Greater productivity
comes from greater specialization. Greater specialization produces greater interdependence,
which maintains standards of living. Entitlement also runs a spiral course.
As the entitlement cycle spirals, the expectation to receive more (standard of living)
while doing less (specialization) leads to mass dependency (entitlement).
With the establishment of the Great Society effort in the U.S. in the mid-1960s,
the U.S. Government declared war on poverty. How has the war been going?
Comparing income statistics from 1966 and 2003 provided by the U.S. Census
Bureau in their historical poverty tables, it is clear that the percentage of people in
the U.S. living below the poverty line has not significantly changed (1966: 14.7%,
2003: 12.5%) and has never been below 10%.

Even with the expenditure of billions
of dollars to address the problem, the measurable economic results have been
marginal at best.
The
desire
to produce is as important in the techonomic economy as the
ability
to
produce. With computers and networks acting as leverage for the mind, anyone possessing
the will to serve can find an opportunity to serve. Agricultural workers displaced
by the industrial age did not have it as good. Industry was slow to develop and expand
into the rural agricultural regions, leaving displaced workers with few options.
Computers and process have created a more level playing field for entry-level
positions. But with welfare payments approaching minimum wage earning capacity,

the motivation fueled by basic needs has diminished the will to work. Subsidized
housing, subsidized meals, subsidized transportation, and subsidized healthcare challenge
the thinking poor to consider the economic advantages of
not working.
The
marginal economic benefits of minimum wage work are seen as negated by the
constraining commitment of time and the costs (transportation, clothes, food) associated
with work. The honor of self-sufficiency and pride of accomplishment has
been erased in large segments of the community.
Techonomics anticipates that those
cultures constraining or eliminating the entitlement mentality will be the cultures
to dominate future markets.
Technology will assure that those who desire to be
productive have the opportunity to be. Economics will assure that those willing to
perform an honest day’s work for an honest day’s pay will be rewarded for doing
so. Conversely, technology placed into the hands of one lacking a work ethic will
never be optimally deployed, no matter how innovative. Global competition ultimately
guarantees the demise of entitlement.
In this chapter, we have used techonomics to anticipate the key trends of our
generation, the transition to the Virtual Age. To anticipate trends in the marketplace,
techonomics assumes that the evolutionary powers of the free market are able to
work. But when the free market is constrained, a techonomic analysis can also be
used to study the detrimental trends in the market and offer corrective recommendations.
The next chapter will review contemporary economic challenges of our
time, seeking practical, workable techonomic remedies.

PROTECTIONISM

When governments intervene in an effort to protect segments of industry or population
from the realities of the competitive economy, the result is always the same:
descent into the abyss of mediocrity. The clearest evidence on an international level
in my lifetime was the condition of the Soviet Union at the time of the fall of the
Berlin Wall. The Soviet Union, with abundant natural resources and a vibrant people,
had outwardly acted as a world superpower for 40 years. But on the inside, the
government pursued a noncompetitive socialistic economic policy and could barely
feed its populace. When the wall fell, none of the country’s producers were strong
or capable enough to assume a competitive role in the world economy. Fifteen years
later, progress is still slow. Once destroyed, the infrastructure and will required to
embrace competition is not easily cultivated.
The free market economy is the filter in techonomics providing natural selection
of best technology practices and causing them to proliferate. When markets are
contrived or unduly constrained, the long-term effects are analogous to creating a
zoo in the biological world. Animals confined to the protective environment of a
zoo for years or for generations lose the knowledge, cunning, and will to survive in
the “wild.” The zoo, where the weak and feeble are protected and allowed to
procreate, fosters a sort of inverse natural selection.
Some years ago, red wolves were reintroduced into the Great Smoky Mountains
National Park. These particular wolves had never lived in the wild. They were
reintroduced into a protected area and fed with meat thrown over a tall wooden
fence. After several weeks, the frequency of the feedings was reduced to encourage
the wolves to begin hunting. Instead, the wolves spent most of their waking hours
walking around the area looking up at the trees waiting for food to fall from the
sky! Only a small number made the transition to freedom. The reintroduction program
for the red wolf in the Smokies has been discontinued.
Protectionism in economic markets works the same way. The market cannot
protect itself; quite the contrary. A market left to itself will reward best practices
with economic success and punish poor practices with failure. Protectionist practices
have to originate outside the system. The laws of economics govern the marketplace
unless a powerful external influence dictates a modified set of standards. The outside
influencer of major markets is commonly a national government — no other single
entity has enough power over the market.
The U.S. government has, for example, used antitrust measures to protect the
market. Whether it was the breakup of American Telephone and Telegraph (the Bell
System), the paring down of International Business Machines, or the decoupling of
Microsoft’s key products, in the past when a company became (in the government’s
view) too successful and powerful, the government would act. In the age of multinational
corporations holding little national allegiance, techonomics anticipates that
this form of imposed corporate control will become much more difficult to impress.
Wal-Mart is a good example. With its significant nation-sized revenues, Wal-Mart
is capable of influencing the international balance of trade. Locally, Wal-Mart is
such a powerful provider of jobs, employment taxes, and local sales taxes that it can
frequently obtain assistance from local governments to procure desired land for new
outlets. Few government officials will take a stand to weaken such a corporation,
no matter how large it gets.
Will multinational corporations become so powerful they overshadow nations,
or will nations, with tariffs, taxes, and antitrust regulations manage to control businesses?
If Wal-Mart is any indicator, the multinationals are going to win if it comes
to a test. Why? Techonomics. The multinational corporation in the age of virtual
companies is no longer bound to location. It can move headquarters, distribution,
manufacturing, research, and marketing to any location on Earth. If the government
presses anticompetitive suits against a giant like Wal-Mart, they are hurting every
consumer in the nation. Just about every voter is a consumer! Excessive business
or employment taxes will have the same effect in the level playing field of this
century. Just as U.S. companies often incorporate in Delaware before a public
offering, due to tax considerations, multinationals will seek tax-sheltering countries
if the tax and liability costs of headquartering in the U.S. are significantly more
burdensome than in other nations.
When a nation chooses protectionism, which in turn encourages inefficient
organizational practices, organizations lose the ability, will, or both, to compete.
Economic protectionism is advanced by several methods: creating artificial trade
barriers, providing unequal access to resources (land right-of-way, water access,
broadcast frequencies, etc.) that result in an economic monopoly, or evaluating
“competitive” bids on a basis other than economic merit.

If such practices ultimately result in weaker economic organizations, why does
government perpetuate them? Most protectionist practices are an effort to gain
political power or financial capital from those protected, or to maintain the status
quo of past economic tradition (to maintain political influence with the general
populace). However, they can also result from the unintended consequences of an
action targeted at another market.

As observed with the ultimate demise of the economies of the Soviet Block
nations, protectionism leads to economic failure. In the U.S., protection of the steel
industry simply slowed its demise. In Japan, protection of the rice industry resulted
in higher prices for rice and other grains.

INCREASING EFFICIENCY FROM SPECIALIZATION YIELDS INCREASING INTERDEPENDENCE

The last 150 years of technological advance, combined with an economic system
that rewards proper use of capital, has resulted in a material standard of living for
U.S. citizens and first-world nations that is higher than that enjoyed by any people
previously on Earth. The “natural selection” forced by the competitive economy
and the accelerator of capital, attracted by the best opportunities, has caused best
technological practices to be advanced, benefiting many millions of people. The vast
majority of citizens in this society have access to food, healthcare, entertainment,
and educational opportunities beyond the reach of kings two centuries ago.
Competition has caused a relentless journey toward efficiency and its counterpart:
specialization. As we group together in ever-larger communities of specialized
individuals, we become much more dependent on each other for the basic sustenance
of our daily lives (food, fuel, etc). While our standard of living is far advanced over
any ever known, reliance upon the productive output of others is also increasing.
Such is the march of techonomics. The tangible sides of the organizational square
— energy, computation, and communication — progress at accelerating rates linked
inextricably to each other. What of the fourth side: community and its spirit? Will
community life progress in the midst of superlative material comfort?
In his classic study of successful individuals,
Think and Grow Rich,
Napoleon
Hill repeatedly observed that an individual’s greatest success was never reached
before a great failure.

Success had a price. Might that also be true for organizations
and societies — that the times of greatest progress follow times of greatest challenge?
Is there a collective will that contributes to the constitution of a people that is valuable
to nurture, protect, and preserve, or are the citizens of a nation simple cogs in a
scheme too large to influence? A superpower economy followed the Great Economic
Depression. A superpower military followed the great struggle of World War II. The
challenge from one man, John F. Kennedy, and fear of a competitor with a lead, the
Soviet Union, urged a nation to send a man to the moon and back by a definitive
date, and the nation responded.
Facing trials and overcoming them builds character in organizations as well as
individuals. The free market global economy is creating many trials in this time of
transition. It always has. The U.S. Civil War was a battle between the Agricultural
and the Industrial Ages at the same time it was a battle for states’ rights and freedom
of slaves. How to maintain high material standards of living for the masses will be
the key battle in the transition from the Industrial to the Virtual Age.
The enemies of healthy organizations, as well as of interdependent communities
of working people, are excessive protectionism and entitlement. Certainly, societies
have a moral obligation to protect their economic interests from being overpowered
by businesses or foreign interests. But the entitlement mindset is a great destroyer
of personal initiative and ultimately diminishes the ability of societies to effectively
participate in the operation of global free markets and their benefits.

Sunday, July 1, 2007

COMMUNICATIONS: EXPANDING CONTROL AND INFLUENCE

Combined with the powerful leverage of the computer, the growing network of
digital communications provides an expanding breadth of control in the Virtual Age.
Management, via electronic networks, can be
virtually
anywhere. Fading away are
organizational charts with layers of middle-level management to carry out executive
directives. While vestiges of these organizations still exist, primarily in older companies
with their roots in the industrial age, there is a measurable increase in the
span of control in Virtual Age companies. It is evident from the techonomic metric,
described earlier, of “revenue per employee.” It is also evident in the vernacular of
the last decade: right sizing, lean engineering, flat organization, remote operations,
etc.
Free market economic pressure is the companion of technology advance causing
this sweeping organizational change. Companies must not only produce good products,
they must use the most efficient methods of production, distribution, capital
management, and customer service to provide their products/services at a competitive
price. The organization and use of labor resources become increasingly critical
to the continued economic success of an enterprise. Information technology has
become the tool to optimize labor use, just as mechanization was the tool that
transformed labor patterns from the agricultural to the industrial age. Organizational
structures must change, or the organizations themselves will become extinct.
Ubiquitous communications in the form of high-bandwidth digital connectivity
is opening the possibilities of expanding remote operations. Plant engineers for
Tennessee Eastman operate plants across the world, remotely, by observing plant
performance via distant sensors and making adjustments to processes a world away.
The University of Phoenix and the National Technological University train thousands
of graduate students across the nation by satellite and Internet links rather than in
brick-and-mortar classrooms. You gain access to more information than is available
in the Library of Congress many times a day simply by making a query on Google
or other search engines on the Web. Not only has there never been a period in the
world’s history where so much information was being generated, but there also has
never been a period when that information was accessible in a nonlinear, “searchable”
manner by the masses. The resulting shifts in organizational structure are only
beginning to emerge and will continue to develop as the Virtual Age matures.
The foundational laws of techonomics — continued electronic intelligence,
continued network expansion, and continued organizational efficiency — anticipate
several organizational trends including:
1.
Organization structure will flatten.
A broader span of control, supported
by communications and information structures, will grow simultaneously
with reducing layers of management and bureaucracy in all organizations
driven by the private sector. The pressures of competition will force
nonoptimal (price and productivity) labor use to be eliminated.
2.
Virtual companies will proliferate.
Small leadership teams will commandeer
the needed resources, wherever the best are located, and manage
them remotely using electronic commerce methods. The term “micromultinationals”
has recently been coined to describe technology startups
that obtain capital with a small domestic team while most of the development
labor is scattered around the world. One key to success is to retain
the “crown jewels” of the organization as outsourcing occurs, or the day
comes when the organization has no sustainable competitive advantage.
3.
Franchise structures will continue to grow.
Within this growth structure,
a successful organizational model is conceived, tested, and proven on a
local scale and then rapidly distributed worldwide with electronic checks
and balances to monitor progress and foster success.

4.
Global labor rates will equalize.
Availability of inexpensive global communications
breached the last natural barrier to large differential labor
rates for information workers. Twenty years ago, a transpacific call could
easily be $1 a minute ($60/hour). Today, it is under $0.05 a minute
($3.00/hour). The international labor rate communications differential for
information worker jobs is now very small (thanks to technology advance,
communications deregulations, and capital investment in building the
networks). Indirect labor costs now become important in determining any
competitive labor rates. Healthcare, retirement, unemployment insurance,
workman’s compensation insurance, and liability insurance become significant
labor considerations as the communications costs diminish to
insignificance. Hence, the U.S. consumer is serviced by telemarketing
calls from India, architectural drawings from Taiwan, software programming
from Ireland, manufacturing from China and Japan, and accounting
assistance from Singapore. Traditional barriers to entry for skilled labor
have been eclipsed by the ubiquitous network and virtual digital workflow
in the Virtual Age.
5.
World languages will converge.
The Internet, television, and other technologies
are healing the curse of the Tower of Babel. Today, humankind’s
ability to work together is being restored on a large scale, and the return
of “universal language(s) is the key. Because of TV, verbal language
accents in the U.S. have become more homogenized. Computer programming
in English language (COBOL, FORTRAN, BASIC, C++, HTML,
etc.) has caused the technologically elite in many countries to learn
English. Commerce and communications today are crossing more international
boundaries. According to Manfred Sellner, assistant professor of
linguistics at the University of Salzburg, “English, formerly perceived as
a symbol of linguistic imperialism, is now accepted as the primary vehicle
of economic globalization.”
8
Techonomics anticipates a trend toward unification
of languages as more people become bilingual in one of the
languages of major population groups for commerce: Chinese, Spanish,
and especially English.
Whether the job is software development, telemarketing, product service call
center, accounting, drafting, or Web site design, the digital pipeline moving at the
speed of light is not concerned about the source or destination of the endeavor.
In
the Virtual Age labor cost, cultural work ethic and trainability are more important
than societal infrastructure (roads, water, utilities, etc.) as long as the digital
pipeline is available.
In some regions, the first installation of the digital pipeline
will be wireless, reducing the capital and land “right-of-way” requirements for the
infrastructure while leapfrogging the wired infrastructure of other nations.
Hence, another past U.S. labor protection barrier, the great physical infrastructure
for support of commerce in the U.S., is leapfrogged by these innovative communication
technologies.
This competitive pressure is accelerating industrial evolution into the Virtual
Age at an unprecedented rate. The economic barriers to significant labor rate differential for mental labor have been removed by the onslaught of technology in
the digital age. A few of the key product trends in communications to note include:

Wireless world
. The combination of diminishing electronic costs (First
Law) and increasing network connectivity (Second Law), along with the
desire to be more efficient (Third Law), is leading to the rapid expansion
of wireless networks. Cell phones have blazed the path, and mobile computers
are rapidly following. RFID tags will enable every package/product
of any significant value to be tracked from cradle to grave, and any useful
information (maintenance, owner, location of manufacture, location of
use) will travel with the product. It will be cheaper to automate this
process, having the information always available, than it will be to maintain
any written records of the product history.
Anticipate an expansion
in the Internet protocol numbering system so every manufactured product
will have its own address.
The RFID communicates to a unique Web
site for every significant product you own, tracking usage patterns, location,
maintenance records, etc. Expect RFID in passports, too, following
people across every border. Blue Tooth technology will allow handheld
devices to communicate with each other while they also communicate
with any intelligent device requiring transactional information (vending
machines, toll plazas, checkout registers). The wireless world will complete
the promise of 7/24/365: anyone, anywhere, anytime. The access to
products and information that companies like Amazon and Google have
brought to the desktop will be available ubiquitously. Instant gratification
just keeps getting more gratifying, instantly, in the Virtual Age. The realworld
delivery companies (United Parcel Service, Federal Express, etc.)
should see continued expansion as they become the physical fulfillment
channel for virtual commerce.

Media convergence: home, mobile, vehicular.
Convergence is happening
in three key areas today: home media, hand-held devices, and vehicular
media. The pockets of our generation are filled with small, electronic
gadgets, thanks in no small part to Moore’s Law. Cell phones, digital
cameras, personal digital assistants, video cameras, MP3 players, personal
dictation devices, web browsers, e-mail sending and receiving devices,
Global Positioning System (GPS), and Blue Tooth activating keys are
cluttering our pockets and countertops. The “Swiss Army Knife” of mobile
convergence will emerge as the device that joins many of these functions
in a small, reliable, high-performance package. Many cell phones now
take pictures, include e-mail, track GPS, play music, and so on. The next
decade will bring an army of product offerings that seek to find the market
optimum between functionality, price- and ease of use.
As chip performance
increases (First Law) and the wireless network expands in coverage
and capacity (Second Law), the ability to package more media
forms into the same package will continue.
The question remains: What
is the market interested in, and what price will the market bear? The
successful business models will arise from the hardware/service models that currently dominate the cell phone market. Such an approach allows
the high-entry-level cost of new, cutting-edge technologies to be distributed
over several payments of a monthly service agreement. The resulting
residual service payments create predictable revenues, typically with
strong profits, once the capital of the infrastructure is recovered.

Vehicular media expansion
. With the advent of GPS in automobiles and
trucks, color displays in vehicles are now becoming commonplace. The
conflict between useful service and driving distraction is growing. Convergence
in the automobile will bring together the same devices as the
handheld convergence, with the addition of a screen large enough to
provide maps and entertainment. These systems are now available in highend
vehicles and will progress into mass applications as price falls and
the features and network increase. Anticipate widespread use of mobile
text messaging, web browsing, MP3 interfaces, DVDs (on rear screens),
integrated GPS, integrated mobile phone coverage, and a smart sensory
system reporting vehicular conditions to “big brother” in the event of an
emergency. As the network of intelligent sensors on our major roadways
is expanded, anticipate communications of that information and of
weather information directly to the vehicle. Honda has developed an
interactive path-planning agent that takes traffic information into consideration.
Also anticipate a host of safety sensors that monitor speed and
following distance, alert when highway sideline is crossed, and monitor
road conditions to recommend safe speeds. The network of networks,
combined with wireless access, will provide traffic information, weather
information, hotel availability, make dinner reservations, and read your
e-mail to you as you drive. Most of this is already available in vehicles
as optional products, but it will soon follow First and Second Law trends
to the mass market.

Ubiquitous sensory network.
According to
One Digital Day,
you should
carefully consider how you look in New York City, because you are
captured on video over 20 times in the typical day.
9
Video cameras in
elevators, lobbies, restaurants, convenient stores, gas pumps, street lights,
etc. are capturing and saving, at least for a while, your image.
Camera
and storage costs have plummeted due to Moore’s Law, and remote
cameras can send information to a central repository via the expanding
network.
Cameras do not just track us; they track our transactions with
the aid of the network. Federal Express captures a digital image of every
package it ships (over 3 million a day in the Memphis processing center)
and retains this information for months in case of a delivery question.
Major highways have sensors to monitor and redirect traffic flows and
control traffic lights. New vehicles have global positioning sensors that
track location, speed, and perhaps even cargo manifests. Cellular telephone
towers will be equipped with sensors to monitor the air quality to
provide early warning for pollution alerts or terrorism acts. All the
foundational laws of twenty-first-century techonomics point to an ever-expanding network of sensors, data collection, data storage, and automatic
evaluation of our every act.

Automated bureaucracy.
Although this may sound like an oxymoron,
the automated bureaucracy is growing at an increasing pace. A combination
of high labor costs (economics) and advancing computer capabilities
(technology) has made the replacement of human mental labor economically
possible and a competitive necessity. Touch-screen systems are
eliminating the need for bank tellers, post office clerks, cash register
attendants, and tollbooth operators. Automatic telephone systems eliminate
the need for receptionists and greatly reduce the number of personnel
needed to field product inquiries and technical support. Automated form
processing for everything from loans to computer orders streamlines the
labor content. Look for more evidence of the automated bureaucracy in
retail stores as they trim costs to compete with the most efficient purveyor
of automated bureaucracy, the Internet.

Personalized pharmaceuticals.
Many advances in the understanding of
DNA and metabolism have been made in the last decade due to new
imaging instruments (First Law), massive data processing (First Law),
and collaboration (Second Law) in the research community. The field of
personalized medicine, particularly personalized pharmacology, is emerging.
This refers to the development of pharmaceuticals and treatment
methods based on the DNA of the individual being aided. Rather than a
blanket approach to a given disease, these treatments take into account
the DNA configuration of the patient to determine the treatment option
most likely to succeed, even to the point of creating drug delivery “tags”
based on DNA from the patient. Without the massive computational effort
to identify the human genome in the 1990s, the information needed to
develop these treatments would not be available. The Human Genome
Project represented massive scientific collaboration from many participants
to address a large research target simultaneously. The next step in
the effort is to convert this data and knowledge into treatment regimens
resulting in personalized treatments. The network of networks will be able
to track the spread of epidemics and the effectiveness of treatments on an
ongoing basis, provided confidentiality considerations do not make information
inaccessible.

COMPUTATION: ALL THINGS DIGITAL

The advent of electronic computation and mass information communications is
causing another age to dawn. Calling this age the Information Age would be like
calling the Industrial Age the Steam Age; information is only one key part of the
picture. For lack of better terminology, this age has been referred to as the postindustrial
or postmodern era. Perhaps a better term is
the Virtual Age: an age in which
digital computation, the ubiquitous network, and increasing personal productivity
allows virtual representation of all that was once physically tangible.
As we view organizations through the simple four-square analysis — energy,
computation, communications, and community — it is evident that advances in
computation and communications dominate the current transition beyond the industrialized
age. The spotlight in this age is on the computer. Society’s current journey
is “from atoms to bits.”
6
It is an economic transformation. The old economy measured
the cost of goods in terms of intrinsic weight, while the new economy measures the
cost of goods based on the intrinsic value of the function they perform.
New goods and services give rise to new occupations, new businesses, and
entirely new ways of organizing society. Pictures, documents, money, video, music,
telephone calls, entertainment, and records of all types have migrated from analog
or atom-based media to digital representations. In the digital form, any data type
can be stored and computed upon with the same electronic hardware. There is no
need for multiple information and media formats for video storage, audio information,
photographic information, written information, etc. The universal world of data
storage, management, and manipulation has arrived. The information is digital, and
its storage is electronic memory.
In digital form, information can be shipped anywhere at the speed of light. It
can be transformed, manipulated, searched, stored, retrieved, shared, or massively
distributed, all within the virtual world of the computer and the Internet. Today,
actions on information can be performed instantaneously, simultaneously, anonymously,
ubiquitously, and inexpensively. Labor transformation will be as significant
in this age as it was in the move from Agricultural Age to Industrial Age. Steam

power supplanted (to a large degree) physical effort in the previous transition.
Computational power will “supplant” mental labor in the current transition.
The
long-held promise of automation has been realized in this generation in the form
of a personal computer capable of replacing bureaucratic labor at a fraction of
the cost
.
7
Franchised business models replace thinking positions with simplified repetitive
processes that can be quickly learned and accurately repeated. Tougher assignments
like inventory management and financial accounting operations are automated by
the network of computers in everything from the cash register point of sale to the
delivery truck global tracking system. Those mental labor functions that the computer
cannot fully automate can be quantified and transported worldwide, to be performed
by the most cost-effective labor pool.
The move from atoms to bits means complex, effective models of reality are
now resident in computers, and the line between real and virtual is blurring. Money
is electronic, consummating financial transactions at the speed of light — no more
mail float at the end of the month. Fluency and ease with the computer is the
technologic skill required for this economy. The labor of thinking for the working
masses — that is, of “task-oriented” mathematical thinking and any systematic,
repetitive thinking — is diminished. Computers, and their increasingly sophisticated
software, do this kind of thinking for the user.
Computers are superb at doing the math (spreadsheets, making changes, etc.).
They write reports from automatic measurements (financial reports, applications,
etc.). They search the available media for your preferences (search engines, Tivo,
etc.). The information worker need only follow the script. Work ethic, computer
literacy, and compensation requirements are the economic measures of workforce
competitiveness. Human labor in this specific context is not particularly creative or
interesting, but the efficiency of this system will free human time for other pursuits.
Here are a few of the computational product trends gathering momentum from
twenty-first-century techonomics:

Digital omniscience
.
The big brother to data is knowledge. All electronic
transaction data is available on the network of networks (Second Law),
and the computational power to analyze it is rapidly progressing (First
Law) without the need for human intervention (Third Law). With the
volumes of data being collected from transactions on the ubiquitous network,
the companion advance will be intelligent systems that mine useful
information from this data. Consider how much the network knows about
you. Every time you use your credit card: electronic transaction; every
time you write a check: digitized transaction; every time you write an email:
electronic record; every time you search the Web: cookies watch;
every time you make a telephone call: electronic transmission. Following
your electronic data footprint reveals a lot about you. Cash transactions
are not the answer, either. Radio Frequency Identification (RFID) devices
are becoming so inexpensive (First Law) that they will be embedded into
major currencies within the decade. Amazon.com has been an early mover
in trying to understand customer preferences and use that understanding to increase sales to that customer. Such buying recommendations are the
tip of the iceberg of data mining for specific value added. In the fight
against terrorism, automated monitoring capabilities and data mining for
all forms of personal communications have been enhanced and used. We
face a brave new world in which not only every transaction is captured,
but the computational capability exists to infer potential future behavior
from combinations of those transactions. Certainly, the data and analysis
means are available if the models of human behavior become more accurate.

Genesis of the virtual world
.
This generation will witness the creation of
a virtual world for interaction, entertainment, commerce, and education.
First Law computation advances make graphic displays realistic, compelling,
miniaturized, low power, and inexpensive. The Second Law joins
the world, via the Internet, into a virtual community only a keyboard
away, or in a totally wireless world, provides the virtual anywhere. Threedimensional
animated video games create worlds so compelling that players
spend all their waking hours in an imaginary environment. Animated
movies blur the line between the real and the computer generated.
Each year, technological advances in hardware, software, and content further
blur the line between real and virtual. Today, a greater diversity of physical goods
can be accessed via the Internet virtually than can be made available physically at
the largest real shopping mall. The eminent missing product, which will link the
masses with a compelling virtual world, is the transformation of the computer display
to a head-tracking, eyeglass-like immersive device.
Such a device could lead to the
creation of totally virtual life experiences rivaling the experience of the real world.
A comfortable system combining high-resolution, wide-angle stereo display, seamless
kinesthetic tracking, and directional stereo audio output would immerse the user
into 90% of the real-world data input of the human sensory experience. In the years
ahead, such devices will change our comprehension of the media experience. With
techonomic trends supporting electronic miniaturization, community network interaction,
realistic generation of animated displays, and a market demanding an evermore-
realistic entertainment experience, the age of the virtual world is approaching.

Emerging Techonomic Trends

INTRODUCTION
The first three laws of techonomics provide a foundation for analyzing other developments
currently shaping our society. When two or more of the first laws combine
to support an emerging endeavor, that endeavor will likely become economically
viable and find widespread adoption in the future. We are now seeing several
endeavors being shaped into techonomic trends because they are highly favored by
these laws. These techonomic developments are active in all four sides of the
organizational square: energy, computation, communications, and community. This
chapter discusses the marquee trends anticipated in the next two decades categorized
by the organizational square and specific technology developments to watch as trend
leaders (see Chapter 9 for techonomic trends in the more distant future).
ENERGY: JOURNEY TO RENEWABLE
ENERGY RESOURCES
To understand contemporary techonomic effects on the direction of society, one must
first understand their effects on energy. It was steam power that ushered in the
Industrial Age, replacing the animate labor of the Agricultural Age with machine
power. The Industrial Age rapidly developed based on fossil fuels — a nonrenewable
source — magnifying our muscle. Society flourished materially, but the resulting
pollution from combustion of finite fossil fuel reserves raises serious energy production
questions in the postindustrial era. Answers to energy questions must be
based on a holistic picture: technology, economics, politics, the environment, and
society.
The key question to answer is this: What is acceptable risk for provision of
energy? The way each nation/society answers this question over the next decade
will set the course for their economic viability over the next 50 years. This is because
it takes a long time to design and construct major power generating facilities, and
worldwide competition for energy resources is increasing. Intelligent national leaders
recognize the need to plan and develop energy generation capacity before
crisis arrives rather than waiting for catastrophic shortages that demand emergency
measures.

Societies need energy to function, and twenty-first-century societies worldwide
need energy in increasing quantities to support improving standards of living. While
conservation efforts are laudable, society can no more save its way out of an energy
need than an individual can starve his/her way out of a nutritional need. Individuals
function on food, societies on energy. Remove energy, and the standard of living is
instantly diminished (remember what happens when we are without electricity for
an hour, day, week, longer). This section considers various avenues of energy
production readily at hand or eminent, not futuristic possibilities with no time
horizon for their broad commercial application.
For this broad discussion, renewable energy sources are categorized into four
broad classifications: biological (ethanol from plants, etc.), cyclical (solar, wind,
wave, geothermal, etc.), chemical (batteries, fuel cells, hydrogen cycle, etc.), and
nuclear (breeder fission, fusion, etc.) Techonomics balances the technology trends
with the economic realities of the marketplace to give insight into the near-term
future of this industry.

EMERGING TECHONOMIC CONCLUSIONS

Time is money! Successful businesses use technology and strategic relationships to
maximize free cash flow for their operations. Several factors contribute to structuring
a business to maximize free cash flow. These include minimizing the time between
obtaining an order and receiving payment from buyers, negotiating long-payment
terms with suppliers for reimbursement of goods, minimizing or eliminating cost of
goods, minimizing or eliminating inventory for supplies, minimizing or eliminating
warehousing of finished goods, and using other people’s capital for manufacturing
and retailing facilities. Techonomic metrics like free cash flow per share or the
number of transactions per employee allow the myriad of system advancements to
be measured in the aggregate by a simple value. System adjustments that improve
the metric advance the organization toward its operational goal.
Technology has changed the speed, complexity, and coordination with which
commerce can be performed. Money now travels at the speed of light from buyer
to seller, although due to negotiated relationships the money often does not travel
as fast from seller to supplier. The buyer can now accomplish complex transactions,
like the personal configuration of a personal computer. User-friendly, interactive
Web pages eliminate the need for human salespeople to consummate every sale with
a buyer. This significant sales labor savings is made possible by the ubiquitous
availability of personal computers and the interconnected network of networks, the
Internet. Next, the data handling capabilities of the network convert the buyer’s
desires into orders for the seller.
eBay has proven that the Web is capable of effectively matching hundreds of
millions of buyers and sellers for the exchange of billions of items. Dell has shown
that scores of suppliers can be coordinated to fulfill the desires of the buyer without
human administrative intervention. Apple has created an automated information
delivery system and infrastructure to match music producers with the desires of
millions of music aficionados. Essentially, the iPod delivers the musical experience
with convenience, selection, and economy superior to any previous system in history.
This section would be incomplete without mention of Google and its advancement
gained from riding the twenty-first-century techonomic trends. By matching
information seekers with the vast Internet reservoir of information, Google produces
strong free cash flow by selling pass-thru links on its automatically generated virtual
pages. Google epitomizes of the finder of “perfect information”: free, instant, all
encompassing. The only drawback is the overwhelming amount and the validity of some of the sources. Revenues are generated from sites that seek interested eyes for
their materials. Prequalified viewers are passed to these sites based on the active
inquiries that the viewers make to the Google search engines, a virtual, all-knowing
finder for a small fee per transaction performing billions of information transactions
a year (a month? a day?).
Today’s fittest companies are also raising the value of annual revenue per
employee. A decade ago, $100,000 in annual revenue per employee indicated healthy
performance for a range of companies. Now, with outsourcing, vast supplier networks,
and virtual relationships, the emerging techonomic companies are entering
the range of 500,000 to $1,000,000 in annual revenue per employee. Even the best
older companies, saddled with less agile corporate structures and remnants of the
old economy, struggle to reach revenue per employee levels of half that value.
Twenty-first-century techonomic businesses treat the time value of information
as one of their greatest opportunities for cash management. By shifting transaction
costs and operational support to both the customer and the supplier, these companies
manage their operating cash assets in such a way as to create positive cash flow as
revenues increase. This allows lower margins by minimizing the cost of capital to
fund operations. These companies also rely heavily on a network of outsourcing to
provide mass customized customer service, just-in-time manufacturing, and ondemand
distribution. Result: a larger-revenue-per-employee operational model than
has typically been possible in the past. Availability of computers in the consumer’s
home (Techonomic Law 1), combined with the interconnectivity of customers,
businesses, suppliers, and distributors (Techonomic Law 2), has resulted in efficiencies
(Techonomic Law 3) and purchasing options that are reshaping the rules
of commerce. Competitive pressures in the free market requiring the adoption of
best practices for improved productivity have never been so great.

VIRTUAL MEDIA: APPLE

First there were wax cylinders, then vinyl disks, then stereo long-play records, then
eight-track tapes, then cassette tapes, then compact disks, then digital videodisks
(DVDs), and now electronic files. The techonomic process of layered innovation
has been repeated in many fields: first there is joy in the discovery (the first
phonograph), then distribution of the capability, then improvements in the quality
(stereophonic), then the ability for the consumer to create the media (recorders),
then miniaturization of the electronics and means for delivery (transistors), then
virtualization of the delivery via a wired network and soon ubiquitous distribution
via a wireless network. The Apple iPod represents the latest in the line of discontinuous
innovations within the music industry.
With each step, reproduction quality advanced, media durability improved, and
replication cost diminished. With the advent of the MP3 music file format and the
plethora of hardware players, the music industry is moving though a period of
massive change. When technology first shifted customer habits from records to
compact disks (CDs), there was little change in how the music industry did business.
Artists recorded, publishers produced, industry marketers promoted music, and
customers bought the physical end product (CD) at music stores or through the mail.
The digital age began to change the industry when low-cost (First Techonomic Law)
CD duplicators allowed customers to copy the music they wanted. The expanding
network (Second Techonomic Law) allowed the music, legally or illegally, to be
transmitted via files to anyone, anywhere. For enjoying music away from the computer
desktop, few wanted to carry a portable computer or even a clunky and limited
portable CD player. Enter the MP3 music player. MP3 stands for “MPEG-2 Layer
3,” which is an audio compression standard developed by the Moving Picture Experts
Group. This technology encodes digital audio in a space-efficient manner.
While most consumer electronics companies saw the obvious opportunity to
develop a market for the MP3 players, Apple took a broader view and created an
entire system for linking buyers to sellers, providing music mobility for the masses.14
For the vast majority that had neither the technical expertise nor the immoral desire
to pirate music, Apple created an integrated, easy-to-use system that gave buyers
legal ownership of what they wanted: easily transportable music. The approach
included software that allowed the user to digitize and load their music collection
to the iPod (an MP3), download and pay for individual songs from a collection of thousands, and organize their own play lists as desired. The recording industry is
forever changed.
Since inception, Apple has now sold, via download, more than half a billion
song files. Each one of these files represents a transaction between a buyer (music
consumer) and seller (music publisher or freelance artist) orchestrated by the invisible
hand of Apple. Apple negotiates the sale price with the publisher, establishes
the Web site parameters, and maintains the Web portal to the marketplace. Each
$0.99 song download is a study in techonomics, with technology enabling free cash
flow for a company that is transferring organized bits of information from the
originator to the user. There is no cost of goods other than the initial set-up costs,
minimal operating costs, and the royalty cost to the originator after the transaction
is complete.
Even the iPod hardware unit itself is a study in short product life cycle and the
value of partnerships. The iPod is a simple device, little more than a portable hard
drive with input from a finger wheel and output to a small display and earphones.
Not a lot of subsystems to advance. Since its introduction in November 2001, the
iPod has morphed into the U2 iPod, the iPod Mini, the Shuffle, the Nano, and
probably more by the time you read this. The 60-GB model lets you download up
to 15,000 songs. Each product has variations of color casing, display, memory
capacity, footprint, and battery life. What remains the same are the important file
format, the interface to the computer, and the interface to the audio output. Vital as
it is to upgrade performance as new generations of technology emerge, it is also
important to retain consistency in the interface portals that tie a device to the world.
By maintaining consistent interfaces and establishing a strong leadership position
in the market for MP3 players, the iPod has spawned an entire industry of
complimentary products. Radio-frequency transmitters connect the iPod to any radio
in a vehicle, home, or office, allowing users to become their own disk jockeys. Small
speaker systems that have a dock for the iPod allow surround sound music to be
taken anywhere as the centerpiece for any table. Necklaces have been designed to
hold iPods. Digitizing microphones from third parties allow the iPod to become a
dictating machine. Radio shows digitize their content for “podcasting.”
Technology increases the product storage capacity and extends battery life, while
allowing improved screen resolution and color displays for minimal cost increases. As
a result, the iPod takes on new possibilities as a digital wallet for pictures and videos.
Where is the iPod headed? Will its technology be assimilated into cell phones
like the Palm Pilot? Or will it make CDs a thing of the past in the same way that
CDs made vinyl records disappear? What would techonomics predict? Techonomic
trends indicate that the hardware price point will decrease due to Moore’s Law and
competition. Over time, the iPod’s functions will be incorporated in other portable
devices, most likely the cell phone, but as music is a form of entertainment, standalone
units will also remain. Apple will be able to maintain a leading position if it
continues to acquire and make easily accessible the media desired by the customer
at a reasonable price.
As technology advances, anticipate an iPod that becomes popular as a digital
movie player, an iPod that allows wireless Internet connection for downloads of
music files, an iPod for wirelessly receiving radio podcasts, and iPods in automobiles. Within 10 years or less, CDs will be a memory, because they are not the most cost
effective way to distribute music. DVDs may see the same fate as distribution
bandwidth increases, compression improves, and storage capacities continue to
increase. These trends are already beginning today as record companies have seen
their sales of CDs decline. Technology has permanently changed music distribution
and enjoyment. It is on the cusp of doing the same for video distribution and
enjoyment. Now the scramble is on for the economic model that will succeed in an
industry that will perpetuate simply because people will always want to be entertained
in the most convenient and inexpensive manner available.

Case study ebay

Since eBay obtains products from so many different sellers, mostly in small
quantity, it is not straightforward to negotiate favorable terms with each seller. eBay’s
approach was to create the PayPal network. PayPal allows eBay to emulate a credit
card provider and profit from the cash float between the buyer’s payment and the
seller’s reception of the goods. Floats are smaller and briefer than those enjoyed by,
say, Wal-Mart — but the cumulative cash float becomes great as transactions multiply.
Not only does the eBay model sell products that are not in the physical inventory
of the company, but it also outsources the virtual merchandizing of the product
listing to the seller. By providing user-friendly listing tools to create product Web
pages, eBay eliminates its own labor content in the listings, thereby increasing its
margins as the quantity of listings increases. eBay receives a listing payment when
the product goes up for auction and a sales commission when the sale transacts.
Bricks and mortar replaced by the virtual storefront. Ad layouts offloaded to the
seller. Financial and fulfillment quality of the sellers monitored and reported by the
buyers. Inventory owned and provided by the sellers. Product features determined
by an educated buyer without paid sales staff. The world’s largest flea market, eBay,
is brought to you online by technology that is transforming old methods to create
new and vibrant businesses.
The first three laws of techonomics combine to support the success of both
Amazon and eBay:
1. The Law of Ubiquitous Computing provides low-cost, high-performance
PCs for millions of homes and businesses. Buyers and sellers are equipped
in increasing numbers.
2. The Law of the Ubiquitous Network interconnects these computers, creating
a snowballing critical mass for buyers, sellers, and products. Buyers
and sellers are connected in increasing numbers.
3. The Law of Increasing Productivity shrinks the size of organizations as
transaction costs tend toward zero. Buyers have the tools to locate and execute the sale without any other human intervention, supporting an
amazing number of transactions per eBay employee.
Add in the economics of free cash flow by electronically controlling the transaction
in the timeliest and most cost-effective manner for the company, and you
have a new model for twenty-first-century business. The Franchise Effect (Chapter
5) is starting to grow around eBay as geographically distributed franchises build
upon the eBay infrastructure to facilitate the posting of items on to the virtual auction
site. Healthy organizations attract new partners into the expanding network of
twenty-first-century techonomics.

VIRTUAL RESELLING: EBAY

eBay is similar to Amazon in many ways. Amazon is recognized for retailing books
and is diversifying into music, electronics, movies, etc. in both the new and resale
market. Once the name recognition and systems for fulfillment are in place, it is a
matter of Web page creation and product acquisition to expand into other markets.
But whereas Amazon uses the industry standard for retail establishments (35%) as
a pass-through markup for timely delivery of new books, eBay takes a different
approach.
eBay is a matchmaker for buyer and seller, usually for used goods.13 Responsibility
for listing the goods, and for their quality and delivery, is the seller’s. For
providing this virtual meeting place and the bid arbitration between the seller and
multiple buyers, eBay receives a small listing fee and a sales commission of about
5%. By listing over 1 billion items in 2004 for its 135 million registered users, the
company reported gross revenues in excess of $3.2 billion. The company employs
about 8,100 people averaging over 123,000 sales transactions per employee in
2004. Without technology, this number of transactions per employee would be
impossible. But with technological magnification, this number becomes entirely
possible and very profitable. In 2004, eBay’s net income was nearly $400,000 per
employee.
As eBay’s infrastructure, methods, and customer base grow, the number of
transactions per employee facilitated by technology will continue to increase. A
possible techonomic metric for monitoring the techonomic performance of eBay is
the transaction efficiency metric.

VIRTUAL RETAIL: AMAZON

In the
Amazon, Inc. 2004 Annual Shareholders Report,
founder and CEO Jeff Bezos
provides a textbook explanation of “free cash flow” to enlighten shareholders about
his company’s financial strategy.
11
Amazon has done with online retailing what Dell
and Wal-Mart have done in terms of structuring business operations to optimize use
of vendors’ cash float.
By bringing buyer and seller together in a virtual store,
collecting the buyer’s funds when the order is placed, and maintaining advantageous
payment terms with suppliers, Amazon is able to grow its free cash flow as
revenues increase.
The technology of the Internet and its availability in the homes
and offices of target buyers combine with electronic transactions for ordering, billing,
and collection to revamp a traditional and stable business: the bookstore.
Small, brick-and-mortar bookstores cannot measure financial performance based
on free cash flow unless they have the buying power to demand product on consignment
from the publisher. As the product ages on the shelf and payment terms are
reached, capital is required to stock the shelves with product (books). The sales
cycle is unpredictable. Compare this to the Amazon model: the product is described
at a user-friendly Web site, a few pages are digitized for the customer to “flip”
through, reviews are generated by the customer, and only a minimum of capital is
expended for the computer system that delivers the information worldwide. Once
the critical systems are in place for serving the customer base, there is only a minimal
incremental cost associated with increasing the product offering by 10, 100, 1000,
or 10,000 titles. Inventory turns are maximized and capital requirements minimized
by keeping on hand only the most popular titles while developing a supply network
that requires the seller network to maintain product until it is purchased.
CEO Bezos states it clearly: “Our most important financial measure is free cash
flow per share.” This is Amazon’s techonomic metric constructed from financial
terms. The free cash flow is enabled by wise use of technology. Additional capital
expenditures can be analyzed according to how they will impact free cash flow. Free
cash flow includes consideration for inventory turnover, payment terms from customers,
payment terms to suppliers, and revenue growth in addition to other, less
dominant factors.

BUSINESS AT THE SPEED OF LIGHT: MICROSOFT

Intel’s position has also been supported by a software operating system from
Microsoft. Microsoft can be viewed from the predictable obsolescence vantage point
also. With each new release of the Microsoft operating system, an entirely new
demand for additional software applications results due to compatibility considerations.
Microsoft, by creating ever-more-capable and complex operating systems,
places an increasing demand on the hardware platform’s calculation and memory
capacity for proper operation. Purchase of a new PC requires purchase of a new
operating system — and often core applications. The predictable obsolescence cycle
becomes self-fulfilling between the larger software systems requiring larger hardware
that requires an operating system and new applications in a continuing spiral.
The advantage to Microsoft’s predictable obsolescence business model relative
to Intel’s is that Microsoft’s does not require large startup capital for manufacturing.
The key to Microsoft’s long-term success is the maintenance of barriers to entry for
the PC operating system. Microsoft’s approach to maintaining these barriers has
been a masterful combination of embracing new technologies (extending the operating
system capabilities with each release), bundling their software with numerous
hardware partners, and acquiring competitors before they become threats.
10
Microsoft has met the “open source” challenge by creating freeware versions
that are not universally compatible, creating a modern-day Tower of Babble. “Open
source” refers free or inexpensive software that provides an open, user-modifiable
platform like Java for the Internet or Linux for computers.
Without a corporate
economic beneficiary to serve as “keeper of the jewels,” all free and openly
extensible software is very corruptible.
Microsoft has to continually put tremendous
resources into Windows to protect this system from hackers and software viruses.
Ease of use, reliability, and compatibility are valuable, and Microsoft knows the
customer is willing to pay for these product qualities. When browsers became a key
to PC communication, Microsoft moved powerfully to create Explorer and then
bundle it with the operating system, again defeating a significant competitive threat.
Strong market position, with the ability to control the next system’s features and
release schedules, continues to propel Microsoft.
Whereas Intel has had major competitive challenges from Advanced Micro
Devices, which builds close copies of Intel microprocessors, Microsoft has not been
anywhere near as sensitive to competitive pressures from direct emulation of its
software. Although almost any piece of technology can be copied with time and
resources, it is much more difficult to copy economic market dominance that is
strengthened by bundled partnerships and thousands of supporting applications.
The principal danger to Microsoft’s strong business position lies in the “climate”
of the cultures and economies where it seeks to grow. Since its product, software, can
be illegally copied and distributed (“pirated”), Microsoft can thrive only where copyright
laws are honored or enforced. As we discussed in Chapter 1, the laws of
techonomics function fully only in environments that allow and respect their operation.

PREDICTABLE ANTIQUATION: INTEL

Planned obsolescence has been an engineering approach to design for as long as there
has been mass production. Nothing lasts forever. But, how long should something be
expected to last? At its best, the process of obsolescence design (or predicting failure
modes) is the combination of economic and technical considerations. Not only is it a
question of how long something should last, but a question of the cost for increasing
the operating life of a product. Such decisions on mechanical parts, like bearings in an
automobile, determine the useful life expectancy of the product.
For mechanical systems, as design margins and safety factors diminished with
the advent of computer-aided design, the expected useful life of products also
decreased. Washing machines and vacuum cleaners of earlier times often served a
household for 20 years or more. Today’s offerings work well, but have been “unitized”
(designed with nonserviceable components) and designed with fewer margins.
Result: more rapid obsolesce. Businesses in the old economy (mechanical/industrial)
developed their product obsolescence around failure modes for the product (bearings,
gears, belts, etc.). Businesses in the new economy (electronic/information) develop
their product obsolescence cycle around the antiquation of their products due to
advancing capabilities (speed, features, compatibility, tax law changes, etc.).
Moore’s Law has lead to a completely new form of planned obsolesce, something
I call predictable antiquation.
Predictable antiquation estimates when product
abandonment will occur due to technological advance, not due to product failure.
Electronic products quickly fall into disfavor, often before they fail to function.
Antiquation may result from computational speed (PCs), operating system incompatibility
(software products), image resolution (digital cameras), storage capacity
(MP3 players), network incompatibility (modems, cell phones), or system integration
usurpation (personal digital assistants). Frequently, it is a battery that will no longer
hold a charge that is the last straw for a frustrated consumer.
Decreasing product life cycles and a continued battle to maintain market position
in the electronic marketplace have been the direct result of the rapid advances in
electronic technology. The emerging and overwhelming phenomenon of product
abandonment, rather than product failure, has given rise to business models that
succeed by significantly surpassing previous product performance capabilities,
inducing a shift in consumer buying patterns. Companies cannibalize themselves
(i.e., they create new and better offerings while they still hold a leadership position
in the marketplace with their previous offering) to feed the consumers’ hunger for
more, faster, better, cheaper. Intel Corp., developer and manufacturer of microprocessors,
has been the leader in pursuing a techonomic business model based on
predicted antiquation.
9
Gordon Moore was a cofounder of Intel and also the originator of Moore’s Law.
Predictable obsolescence was the business DNA upon which Intel was founded, and it was based upon Moore’s technical observations. Basically, if the company ever
stood still for two years with an existing product, it would be surpassed by a wave
of competitors continually improving their offerings. From the start, Intel organized
their design process, marketing launches, and financial planning around the concept
that they must be the first to innovate the next generation of product.
The technological advances revealed in processor performance gains were
remarkable and positioned Intel as the de facto leader in the microprocessor marketplace.
The financial commitment in research, development, marketing, and fabrication
was justifiable only with the technical understanding of this model in mind.
Before Intel, it would have been considered ludicrous to introduce a product that
would usurp market share from your own product when you already controlled most
of the market. Today, market leaders in consumer electronics have to execute their
product plans in this way simply to remain viable in the marketplace. New features,
more memory, more colorful display, greater compatibility, etc. are the requirements
of an ever-more-informed consumer. The instant information and procurement paths
offered by the Internet do not let producers hide behind brand name or strong
distribution channels.
Another strategy Intel used for staying on top of predictable antiquation was
research into new applications that would demand greater product performance —
research into how innovators (small companies and academics, for example) were
using Intel products in demanding ways or with new peripheral devices to stretch
the limits of performance. The PC continued to improve as application demands
continued to expand. Color, sound, networking, display resolution, print resolution,
digital cameras, digital video, modems, broadband, graphics, animation — the list
of software and peripheral advancements related to the PC is lengthy. Most of these
advances occurred in laboratories or engineer’s garages a few years before the speed
of the PC made their performance possible or economically feasible. But each one
placed new demands on the performance of the PC, from speed to memory to
compatibility. The new advances also created new markets with expanding demands
for PCs. PCs moved from the workplace to the home, and from the desktop to the
laptop. Intel’s wisdom, in addition to predictable obsolescence, was the encouragement
and creation of applications that accelerated the demand for better performance.
The increasing performance of the microprocessor has not come without a price.
One major contributor to improvements in operating speed has been manufacturing
methods that pack more components into a given area of silicon. As designs shrank,
manufacturing tolerances have become very demanding, leveraging from numerous
improvements in supporting technologies including material purity, clean-room techniques,
process control, etc. New fabrication facilities and advanced equipment are
required for each new generation of microprocessor. Through technology, microprocessor
improvements will continue to track Moore’s Law expectations for the foreseeable
future.
Economically, is there an end in sight for the expenditure of capital needed to
build fabrication facilities for production of next-generation chips? Certainly Intel
remains committed to this approach. At what point would a techonomic analysis of
the market, its pricing structure, and potential reveal that the risk of taking the next
step exceeds anticipated rewards? Due to the short product life cycle, about two years, the facility capital cost becomes a significant contributor to the overall consideration
of product per unit cost. Below is a techonomic metric for products that
have a limited shelf life and require a significant capital investment.

DEBTLESS FACILITY EXPANSION: WALGREENS

The drug store retail chain Walgreens provides another example of focused use of
technology and creative access to other people’s money to rapidly grow a very fit
organization. Walgreens’ simple business vision is to become the McDonald’s of
pharmaceuticals.
8
This clear parallel connotes clean, efficient operations and a large
number of outlets at prime locations throughout the country. Walgreens has pursued
this goal using a masterful techonomic approach, combining technology for effective
customer service with the economics of other people’s money to finance facilities
without incurring debt. This approach may not work exactly the same way for
everyone, but it exemplifies the foundation of techonomics: thinking that takes
advantage of technology and creates financial opportunities by leveraging resources.
Walgreens has been an early adopter of technology to manage customer records.
In the 1980s, the company created its own satellite communication system to link
its stores. The network allowed a customer of any Walgreens location to get refills
or other help related to prescriptions at any other store on the network. With the
advent of managed healthcare and prescription coverage for medications, Walgreens
was positioned to manage insurance billing for customers, making their transactions
easier.
Collecting store information from many outlets allows the collective whole to
learn from the localized patterns of operations.
Over the years, Walgreens has been
able to use demographic information to target expansion opportunities and then use
individual store performance to determine when full 24-hour operations are financially
justified based on revenues from different profit centers within the store. This detailed knowledge of financial performances and variances is a valuable component
for predicting the performance of potential store locations. As the number of distinct
locations grows, the amount of store performance data increases, as does the customer
database (population density, income, age, medical expenditures, etc.). The
successful local operational model can be replicated hundreds of times in communities
across the nation.
Confidence in the long-term success of individual operations provides a bargaining
position for establishing partnerships. Knowledge is power. Walgreens knows
the size of the store and the site needed. They know the location demographics that
maximize financial return. In a given community, they know where they want to be
located, down to which side of the street is best! Now all they have to do is get a
store open and execute their business.
How does Walgreens rapidly build a large number of stores without incurring a
burdensome debt or equity dilution? Like Dell and Wal-Mart, they find a unique
way to use other people’s money. Walgreens’ source is the local real estate developer.
Via a contractual partnership that affords the developer strong and lasting financial
returns, Walgreens induces the developer to finance the storefront.
In brief, the deal goes like this: Walgreens finds a choice location and approaches
a few developers in the area, seeking a partner. Walgreens states its willingness to
enter a long-term lease for the store at a premium rate (say, $25 per square foot for
30 years). Compare this opportunity to a one- or two-year lease from less stable
occupants at $18 per square foot, and you see why many developers are willing to
fund the Walgreens facility. With a known return on investment, the building and
occupancy risks are minimal for developers, and they are eager for the opportunity.
Walgreens knows, within a small variance, what revenue per square foot a store will
produce and is creating a successful proposition. Both parties win. Walgreens
expands without incurring significant debt.
A techonomic metric that can be helpful in the determining store performance
and product merchandising is the customer value metric. Measuring the cash received
as a result of each customer visit, this metric provides a means to track the productivity
of the store footprint, the product offerings, and the anticipated revenue based
on store traffic.

Competitive margin

Wal-Mart has been a leader in adopting technology that maximizes the competitive
margin. Since they have no control over competitor prices, there are only two
contributors that Wal-Mart can affect to increase this metric: supplier cost and
retailing cost. Using global sourcing and electronic inventory management, while
negotiating favorable terms, Wal-Mart continually drives down their cost of goods.
Using efficient warehousing and distribution channels and technologies that increase
productivity, Wal-Mart reduces the cost of retailing.
Wal-Mart regularly rotates their buyers, those employees who procure products
from suppliers. In doing so, the company assures that fresh eyes are continuously
focused on the goal of the company and not clouded by comfortable relationships.
Wal-Mart regularly “shops” its products to new potential suppliers to see if a lowercost
supplier can be identified, locally or globally. Bids are formally requested and
used as bargaining tools to extract lower prices from current suppliers. While these
practices are challenging, the result is a supplier network with clear expectations
and no chance to rest on past performance.
Wal-Mart was an early adopter of barcodes for inventory tracking (and is now
a first mover for radio-frequency identification tags, RFID, to further automate
stocking processes). Their electronic data for suppliers are transparently integrated,
passing the responsibility and accountability for product availability to the suppliers
without a middleman. This approach is similar to the one used by Dell to minimize
inventories.
Wal-Mart’s use of technology and economic strategies has made it a powerful
leader with a strong competitive position. So powerful, in fact, that it is a silent
force behind the modification of eminent domain laws in the U.S. In the past, eminent domain laws kept the government from seizing private property for any reason other
than the public good (highways, roads, municipal buildings, utility lines, etc.).
Recently, these laws have been under pressure from developers desiring to condemn
property for retail facilities that offer the promise of generating substantial tax
revenues. The 2005 U.S. Supreme Court case of
Kelo v.
City of
New London
is an
example of the broadening of eminent domain to accommodate one private use over
another, diminishing the rights of landowners.
7
While this case did not involve Wal-
Mart in any manner, the ability of commercial developers to use the government as
a means to seize land for economic development purposes was greatly strengthened.
Techonomics predicts that many more eminent domain disputes based on economic
developments will arise in the future as those in power act for what they
deem to be the public good — increasing the tax base.
In summary, Wal-Mart uses a highly automated and continuously monitored
inventory system to place the responsibility for product availability in the hands of
its suppliers. The suppliers, virtually eliminating Wal-Mart’s financial risk, commonly
support the carrying costs for products on Wal-Mart’s shelves. By using digital
networks to tighten the linkage between supplier, retailer, and customer, while
simultaneously negotiating favorable payment terms with suppliers, Wal-Mart generates
a positive cash flow as its revenues grow. Wise use of other people’s money
via optimized data management of inventory logistics is a repeating techonomic
theme of successful twenty-first-century businesses.

POSITIVE CASH-FLOW RETAIL DISTRIBUTION: WAL-MART

Like Dell, Wal-Mart has been a judicious user of technology. This has been a
significant key to its market dominance. While the Third Law of Techonomics
predicts that organization size will shrink as transaction costs reduce, Wal-Mart has
grown rapidly by any measurement over the last 20 years.

This seems to defy the
Third Law, unless you consider the means of expansion: franchise. Wal-Mart found
a model that worked and then replicated it massively, all the while putting in place
systems that allowed smaller work forces to accomplish more. Wal-Mart is constantly
increasing the productivity of its operations via continuous improvements, many
based on technological innovations.
Using twenty-first-century data management systems, Wal-Mart places the
inventory control responsibility for their shelves into the hands of their suppliers.
Suppliers are allocated shelf space based on Wal-Mart’s projections. Suppliers are
responsible for keeping that shelf space full of viable products, and they carry the
cost of this inventory, often for months after the product is sold. Suppliers are left
with the responsibility for unsold merchandise at season’s end if they happened to
overstock Wal-Mart. The key to this system’s success is an electronic data network
linking vendors with inventory information from Wal-Mart central distribution centers,
retail store shelves, and store cash register transactions. Ideally, vendors have
“perfect information” in terms of their company’s collaboration with Wal-Mart (but
they do not get information about Wal-Mart’s other vendors; that is shielded). They
always know how many of their own products are on what shelves at what stores
and how fast they are selling each day.

It is the supplier’s responsibility to have the
right product quantity available at the distribution centers to meet the needs of
the store network.

In this operating model, Wal-Mart looks like a giant consignment shop. Vendors
place products on borrowed shelf space and are paid for only those products that
sell, with payment terms that are favorable to Wal-Mart. It is a very challenging
environment for vendors, but the volume of the opportunity is also very enticing.
The story of one man who said no to Wal-Mart, Jim Wier, then the CEO of Simplicity,
makes interesting points about how the specter of Wal-Mart changes the economics
of competition, even if a company chooses to say no to being a supplier to them.

Wal-Mart minimizes risk by giving inventory responsibility to the vendor. They also
maximize positive cash float by negotiating payment terms that extend beyond the
period of the anticipated cash sale to the customer.

Here is a simple example of the process to illuminate the model. Suppose a
publisher is seeking to sell a book through Wal-Mart. The publisher approaches Wal-
Mart with a proposal to garner the coveted shelf space. After some challenging
negotiations, Wal-Mart agrees to take 10,000 books for 90 days, with an additional
90-day payment term. The books sell for $30 and the publisher is to receive $20 of
that price for all books sold during the 90-day sales period. Everybody is happy.
The publisher now has a potential $200,000 book-selling contract with Wal-Mart.
On day one, the publisher ships 10,000 books to the Wal-Mart distribution center.
They sell well and on day 89, Wal-Mart collects all remaining stock from all stores
(say 1,000 books) and ships them back to the publisher. No payment yet; the terms
were 90-days after the sales period. On day 91, Wal-Mart reorders another 10,000
books to begin selling again, and the cycle repeats. Still no cash in hand for the
publisher, who is now out printing costs for 20,000 books and has 1,000 of them
on hand with Wal-Mart stickers on them! They must be sold for ten cents on the
dollar to a “seconds” dealer. Day 180 comes, and the publisher receives a check for
$180,000 ($20 x 9,000 sold in the first three months). By now, Wal-Mart has sold
the second 9,000 (returning again 1,000 not sold) and has received cash revenue of
$540,000 with a gross profit (profit before operating and overhead costs are deducted)
of $180,000 (18,000 x $10 per book sold). This cash management discipline eliminates
all inventory risk at the expense of a small increase in transportation logistics.
The Wal-Mart logistics system is already in place though, so the incremental cost
of shipping the extra product back to the publisher is minimal.
The gross markup of about 35% is typical of a retailing industry, but Wal-Mart’s
positive cash float results from a system of data management (technology), automated
distribution (technology), and savvy contract negotiation (economics) that
fuels the growth of a highly successful twenty-first-century enterprise. Meanwhile,
Wal-Mart’s suppliers and their competitors both languish while they try to understand
the dynamics of this arrangement. Like them or not, Wal-Mart must be admired for
their systematic approach to maximum efficiency, passing on many cost savings to
the customer and thereby making their competitive position even more substantial.
The success flywheel moves faster and faster, and the inertia of the 1,000 things
Wal-Mart did to get into a dominant position creates a crushing push against competitor
entry. Massive buying power allows negotiation of favorable terms, both cost
and payment cycle. The rolling warehouse network, backed by the automated distribution
system, reduces inventory costs and puts the right products on the shelves
in the right season. The combination of these advantages has made Wal-Mart a very
tough competitor in many sectors. The company systematically enters new markets
with a goal to obtain a market position in excess of 30% of the entire market segment,
placing it in the top two retailers in any given category.
Rank upon rank of companies have been transformed or displaced by the Wal-
Mart juggernaut.

When Wal-Mart enters a small U.S. community, the first to feel
the crush of competition are the “mom and pop” establishments. With limited buying
power and operating hours, they are no match for the diversity of goods or the
competitive pricing of Wal-Mart. Most of these small operations last no more than
two to five years on goodwill, perseverance, and savings. The second rank to fall is
direct competitors. Sears, K-Mart, and Service Merchandise have either ceased business or faded to mere shadows of their former operations. Target and Costco
are the remaining direct competitors. Now Wal-Mart is aggressively entering the
grocery market. Winn-Dixie has recently declared bankruptcy, and long-standing
chains like Kroger and Albertsons are battling for customer loyalty.

Wal-Mart’s success is now causing the competitive restructuring of major product
manufacturers. Proctor and Gamble has merged with Gillette, combining two
companies that had previously been formidable competitors. The first reason listed
in information to shareholders was the necessity of putting the combined corporation
into a better bargaining position with Wal-Mart. The recently hired CEO of Sara
Lee said her company would return to making baked goods, where there was a
reasonable margin, and sell off its clothing lines, because there was no margin
remaining in clothes sold through Wal-Mart’s channels, which had accounted for
over one third of their clothing sales.

The coming impact of Wal-Mart’s dominance may well shift the international
trade balance. For some time, Wal-Mart’s buyers have been commissioned to find
the right product at the best price anywhere in the world. Global sourcing has
been the techonomically logical direction for filling its huge distribution channel.
Low-cost Chinese labor, guided by focused product specifications from Wal-Mart
and interconnected by the global digital network, has caused a massive shift in
global consumer goods manufacturing over the past decade (from Japan and the
U.S. to China). International product collaboration, manufacturing inventory management,
and logistics (technology) have combined with the timeless natural
selector of lowest-cost labor pool (economy) to drive these production trends.

Wal-Mart is nearing “nation” status in its size, negotiating ability, and influence
in the world economy. Figure 6.4 shows the ranking of Wal-Mart as a country if its
revenues were considered a gross national product (in 2003).
If Wal-Mart were a
country its “revenues as GNP” would place it as the 18
th
largest economy in the
world
,
right behind Taiwan and in front of Switzerland.
Even more impressive from a trend standpoint, Wal-Mart and China are the only
two on the list growing at double-digit rates. Within 5 years, China would project
to have the world’s third largest GNP, and Wal-Mart would be nearing the top twelve
(if it were a country). Wal-Mart has almost single-handedly created a massive
distribution channel for Chinese goods in the U.S. over the past decade. The nearterm
result for U.S. consumers has been a slowing of inflation as consumer goods
have remained inexpensive. The long-term result may be that competition for the
world’s basic natural resources (energy sources like petroleum, building supplies
like steel, and raw materials like asphalt) will increase, causing prices to escalate.
The techonomic metric that measures the distance between Wal-Mart and its
competitors is the direct item price comparison. Wal-Mart has traditionally positioned
itself as the low-price provider, satisfied with a 35% retail markup on the
goods it sells. If it can drive a provider to a lower cost with the same payment terms,
then Wal-Mart will pass on the savings to its customers. Its competitors, with a more
costly distribution system, less favorable payment terms with suppliers, and less
purchasing power to drive down supplier costs, are left to price their offerings as
best they can while still making a profit.

The techonomic metric for competition margin measures the performance difference
between Wal-Mart and its challengers in any market. This metric relates the
shelf price for a product from a competitor to the Wal-Mart supplier cost and retailing cost for the same product. Retailing markup is traditionally 35%, which includes
the retailer’s selling costs. As the retailing and supplier costs are reduced in the Wal-
Mart system, the competitive margin increases. If the metric is less than one (1.00),
Wal-Mart loses money on the transaction. An increasing value for the metric beyond
1.35 reveals opportunities for pricing approaches that undercut vulnerable competition.