Computational techonomic

The computational techonomic metric is a bellwether of the advance of digital
“intelligence” in current and future commercial products. As long as this metric
doubles every 12 to 24 months, as it has for the past 40 years, the anticipated shelf
life of digital computational products will be limited.

The latest and greatest digital devices will be outdated in 3 years, replaced by
something much more powerful and probably less expensive. This is one reason an increasing number of electronic firms have opted for contract manufacturing of their
products. The production arrangements are more seasonal batches than permanent
manufacturing lines. The effect of this trend is evident in consumer products ranging
from personal computers to cell telephones, from personal digital assistants to flat
screen televisions.

Electronic product life cycles are about 2 to 3 years and shrinking.
The importance of maintaining your position in the marketplace by “cannibalizing”
(introducing your next product in the same marketplace, taking away sales
from your own product to extend your market position)
your own leadership position
is of increasing economic importance. Intel realized this early in the 1970s and has
followed this approach masterfully for over 30 years, regularly introducing new
microprocessors to supplant their previous offering.

In 1993, Motorola was excelling with a leadership position in the rapidly growing
cellular telephone industry. Their corporate experience with professional systems
for two-way radio communications (police, fire, military) provided them the perfect
technology base to aggressively distribute cellular phone systems for the public.
Using this base, Motorola became a first mover when telephone deregulation
occurred. Their revenues and profitability expanded rapidly for a few years during
the initial cellular phone build out. But they based their approach primarily on the
analog technology they had perfected over the years. They were reluctant to cannibalize
their leadership position when digital transmission technology came on the
scene. Nokia, much smaller and seeking an opportunity to impact the marketplace,
embraced the digital transmission approach and rapidly gained market share. Thus,
a company with far fewer resources and weaker market position turned the tables
on a giant by embracing the technology trend that was inevitable. Motorola spent 5
years recovering and has now returned to a competitive position, but it must now
contend with a formidable opponent limiting market share and profitability in a
competitive industry.

In this same era, Kodak made a similar strategic decision. For decades, Kodak
had maintained a leading position in photographic film, papers, and chemicals. The
digital camera arrived in the photographic marketplace in the early to mid-1990s.
Kodak’s participation in these years was at best a “me too” approach, providing
products that were a generation behind and focusing most of its marketing effort on
a film system (the Kodak APS, Advanced Photographic System) that offered incrementally
improved photographic quality. They also introduced the PhotoCD in an
effort to capture the market from film to CD-ROM for digital information applications.
All of Kodak’s major thrusts at this time were intended to prolong a leadership
position for photographic film while the marketplace was abandoning film as
the capture-and-storage medium for images, replacing it with digital imagers and
memory.

Kodak miscalculated the rapidity with which the quality of consumer digital
photography would become comparable to film photography (resolution, storage
cost, color fidelity — all changing at rates predicted by Moore’s Law.

Digital photography also heralded new possibilities for photography that were
not even considered by those grasping to maintain the position of film (instant
gratification, ease of use, keeping only the pictures desired, digital enhancement,
etc.) In doing so, Kodak missed a significant opportunity to position itself as the processing and printing leader for digital images, thereby extending its paper and
chemical ink businesses. Seeing the rise of digital photography, competition from
many directions arose to provide personal photographic printing (Canon, Hewlett-
Packard, Lexmark, others), digital image print processing (Fuji), and digital cameras
(Nikon, Canon, others). In more recent years, Kodak has refocused its attention on
the printing side of imaging and is regaining lost ground, but the nearly exclusive
leadership position it held in film photography has now been supplanted by the
digital age.

One company that seems to have learned many of these lessons is Apple Computer.
For years they were recognized as a leading innovator of personal computer
technologies, but they suffered long term in the marketplace because of their closed
architectures and premium pricing. This led to less software support and reduced
economies of scale. Apple has successfully introduced a line of MP3 players called
the iPod. In the 3 years since its introduction, Apple has already revamped and
expanded the product numerous times. They have provided a complete solution
including a distribution Web site that combines the audio and video content from
scores of record labels and thousands of artists. Their business model for success is
based as much on media distribution as hardware sales, and according to their Web
site, they have now exceeded 500,000,000 downloads of songs. Realize that the cost
of goods for the electronic transfer is negligible except for royalties that are paid
after the sale, and you begin to realize that Apple is creating a very profitable cash
flow from its media sales in addition to its hardware sales. This is techonomic
thinking at its best — creating and executing a viable economic model based on
technology trends.

Long-term success is not guaranteed, since many competitors are entering this
market, but Apple has established a strong leadership position by changing the way
music is experienced (MP3 player vs. CD player) and changing the financial model
for success by establishing a viable and rapidly growing distribution system that
brings in significant residual revenues. They have an open system from the standpoint
of the music media providers. They have an easily accessed and affordable system
from the standpoint of the customer. And as electronic costs continue to drop due
to trends and manufacturing scale, they are positioned to dominate a lucrative market
for a season — 2 to 3 years. The flock of third-party, add-on accessories that have
emerged due to the popularity of the iPod may position it to remain in a leadership
position for a much longer time due to expanded capability, networks, and partnerships.
Of course, there are other savvy companies out there. The forces of techonomic
natural selection never cease in the free market.

These examples reveal the importance of understanding trends in the deployment
of resources. Even the biggest industry leaders have to make choices on how to
deploy their resources among competing demands.

Such focus enables companies to repeatedly weather the storm of change resulting from the advance of technology and competitive threats. The focus must be on the future, not the past. Learn the lessons of the past, but apply them to where the technology trends are heading, not
where the market has been. Those who wait for the market to lead find themselves
running an exhausting race to catch up with ever-accelerating changes. Summarizing the history of computation from a techonomic perspective yields the following interesting observations:

1. Although humankind increased in understanding of mathematics throughout
the centuries leading up to the modern era, the mechanisms to exploit
this knowledge were limited by slow, human input (abacus, geared calculators,
etc.).

2. With the introduction of electricity into common use at the turn of the
twentieth century, first analog computers and then more impressively
digital computers began to leverage the human mind to address complex
mathematical problems at high speed.

3. The technological developments replacing large, energy-intensive, and
comparatively slow vacuum tubes with transistors and then microcircuits
created an economical approach to computation, opening its possibilities
to the masses.

4. The continued “shrinking act” of microelectronics, now in its fourth
decade, is providing twice the computation performance every 2 years.
This trend does not appear to be abating, and it affects the life cycle of
every digital consumer product.

5. If current trends continue, by 2020 a desktop computer will have the
storage and processing power of a human brain (storing every experience
and able to make inferences on it at the rate of a human). Again, if trends
continue to 2040, that same desktop computer will have the capacity of
the entire human population.

Just as the harnessing of steam lead to rapid growth in leverage for animate
energy, likewise the harnessing of electronic computation lead to rapid growth in
“computational” leverage for the mind power of humanity. The improvements in
computation that society is utilizing could not have occurred without the harnessing
of electricity (energy, side 1 of the organizational square). The knowledge that lead
to the steam engine was captured and distributed by the printing press (communication,
side 3). The printing press was the culmination of hundreds of small advances
over thousands of years leading to paper, ink, movable type, etc. advancing communications.
The pillars supporting organizational evolution also reinforce and accelerate each other.

We now rely on such computations to augment daily activities in thousands of
ways. Machines are designed that are so complex they could not be created without
the aid of existing machines.

One Digital Day: How the Microchip is Changing Our
World pictorially describes how digital computation is touching all aspects of life.

According to One Digital Day, the average American touches 70 microprocessors
before lunch each day. If leverage of physical endeavors was humanity’s greatest
advance in the nineteenth century, augmentation of the human mind via electronic
computation was the greatest advance of the twentieth.