Techonomics

Techonomic Market Crises and Recommendations

2007-07-02T22:54:00.000-07:00

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

2007-07-02T22:52:00.000-07:00

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

2007-07-02T22:50:00.000-07:00

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

2007-07-02T22:47:00.000-07:00

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.

COMMUNICATIONS: EXPANDING CONTROL AND INFLUENCE

2007-07-01T21:45:00.000-07:00

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

2007-07-01T21:44:00.002-07:00

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

2007-07-01T21:44:00.001-07:00

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

2007-07-01T21:43:00.003-07:00

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

2007-07-01T21:43:00.001-07:00

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

2007-07-01T21:42:00.003-07:00

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

2007-07-01T21:42:00.001-07:00

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

2007-07-01T21:41:00.005-07:00

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

2007-07-01T21:41:00.003-07:00

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

2007-07-01T21:41:00.001-07:00

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

2007-07-01T21:40:00.002-07:00

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

2007-07-01T21:40:00.001-07:00

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

2007-07-01T21:38:00.000-07:00

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.

POSITIVE CASH-FLOW MANUFACTURING: DELL

2007-07-01T21:37:00.000-07:00

Dell Computer has been a pioneer in the use of technology to revolutionize the
business of the personal computer industry.
2
The Dell model gives tangible meaning
to terms like mass customization, just-in-time delivery, rolling warehouses, inverted
cash float, and virtual retailing. All these terms relate to business practices made
possible by embracing technologies that have changed traditional business practices.
Dell has rewritten the rules of PC manufacturing and distribution. The PC industry
will never be able to return to its former practices, and those who hesitate to adopt
the new, techonomically driven approach will slowly (or rapidly) be overtaken by
the fittest companies.
The key technologies upon which Dell has based its changes are the PC itself
and the Internet.
Since the first two techonomic laws deal with the ubiquity of
computing and the Internet, Dell is the perfect example of playing to the strengths
of techonomic trends. Without the massive penetration of Internet-connected PCs
available to business and home customers, the Dell approach would not be so
dominant. But with the high penetration of networked PCs and the systems that Dell
has developed to optimize mass customization, Dell has masterfully created a fulfillment
system that is difficult for competitors to overcome. The approach has two pillars: give customers exactly what they want, and manage operational cash flow
by using favorable terms on both the seller and the supplier transactions.
Dell is committed to giving customers exactly what they want as quickly as
possible, one customer at a time. Mass customization. Like the Wendy’s hamburger
with 256 possibilities made from eight different ingredients, Dell stacks up a computer
from options on currently available components (microprocessor, memory,
disks, monitors, modems, operating system, etc.) to serve up a smorgasbord of
product possibilities. Good products configured exactly the way you want them,
when you want them, 24/7/365 thanks to the Internet.
Think how hard this would be in a “paper” world. Because computer components
change so rapidly, the order would be outdated before the ink was dry on the form.
The pricing would also require a spreadsheet to calculate as the combinations from
different vendors at different margins were summed to determine a viable margin
at a competitive price. In the traditional paper world, the best approach would be to
make a lot of one configuration (quantity of scale to be competitive) and market the
configuration until they were all sold. This requires warehousing and inventory costs
to support the mass production run. Consider again the implications of Moore’s Law.
The inventory that is aging has at best an 18-month competitive life, and the
manufacturer risks never selling units produced in a traditional manner, particularly
if they are competing against the mass customization model.
Enter the Internet. Now the customer can enter a virtual storefront on the World
Wide Web, select the exact configuration of computer components desired, place
the order, and buy via a credit card. Dell gladly fulfills the order with guaranteed
payment in hand, knowing what the customer wants to buy, knowing that the sale
price is predetermined, and profiting from the fact that there is no additional distribution
channel cost (middleman) other than a modest shipping cost. No inventory
carrying costs. No distribution channel commissions. No finished product returns
due to time-limited shelf life. The Internet transformed the sales approach, cycle,
and channels. But it does even more related to suppliers and cash flow.
Traditional manufacturing systems obtain parts from suppliers, pay for the parts,
inventory the parts until ready for manufacture, assemble the parts into a product,
ship the products to retailers, and then sell products to customers generating revenues
many weeks after the component parts were purchased. This approach is shown in
Figure 6.1, the key elements in a manufacturing cash-flow model for a traditional
manufacturer. Even though favorable terms can be negotiated, the cycle from procuring
components until selling the product via retail channels is long and requires
capital to fund its growth. As production increases, so must financing for production
in the pipeline.
Use of capital to finance inventory was an accepted business practice until
recently, when just-in-time inventory management approaches (JIT) came along.
By
applying JIT on the supply side, with mass customization direct selling on the
distribution side, Dell has developed a twenty-first-century business model that
actually creates an increasing positive cash flow as production increases.
Figure
6.2 shows the key elements for the Dell positive cash-flow manufacturing model.
The
Inverted Cash-Flow Model
is so named because a traditionally negative cash
flow required for work in process and inventory has been inverted into a positive cash flow. Naturally, Dell loves this model; they get the customer’s cash (electronic
payment) for the finished product (assembled computer) long before they must pay
the suppliers of computer components. Electronic data interchange, World Wide
Web, wire transfer of funds, rolling warehouses, just-in-time delivery, plant-to-door
package delivery networks, and the wire transfer of funds are a few of the key
twenty-first-century technology-backed systems that make possible the Dell model
of inverted cash flow.
Compare the two figures and observe the relative location of revenues and
expenses in the models. This is the most important first-order result of the application
of technology to Dell’s operations, but there are noteworthy second-order effects
that contribute to the effectiveness of the model.
When a customer goes on the Web and orders a new PC, the entire configuration
is defined. The first person to see this configuration is the Dell worker assembling
the finished product.
All the communications to component suppliers, distribution centers, purchasing agents, and trucking fleets have been automatically dispatched
based on the customer’s order and the sequencing of production.
Component
suppliers receive specifications for parts in a sequential order to match the production
staging logistics. At a predetermined time, components from numerous suppliers
converge at the Dell plant for assembly. Upon assembly and software loading, a
burn-in period follows. The package delivery partner picks up the PC for its journey
to the customer as the wire transfer of the customer’s credit card is processed. This
whole process often takes less than 48 hours.
Meanwhile, the component supplier provides extended terms to Dell in order to
secure a large and growing business relationship. Payment terms may be anywhere
from 30 to 90 days, and beyond. Since Dell has no warehouse, Dell receives cash
from the customer well in advance of the payment required to the supplier. Up to
three months of positive cash flow is provided for some portions of the transaction.
The financial benefits of this total approach are many, significant, and obvious:
positive cash flow, no warehousing costs, no carrying inventory, no retail distribution
inventory, and no product aging costs. No surprise that Dell has rocketed to the top
of the list of PC suppliers. By contrast, Compaq was merged with HP because its
distribution channel model failed. Even with increasing sales, price pressure from
the streamlined Dell model caused layoffs at HP. IBM, the originator of the PC
platform, sold its PC interest to Lenovo in China. This is an attempt to leverage the
lower-cost Chinese labor and maintain a presence in the market (and to service a
large and growing Chinese market).
While reducing the manufacturing labor cost content of the PC is a traditional
approach that should yield results, it is the mass customization and inverted cashflow
model that is the strength of Dell’s continuing competitive advantage. Dell’s
suppliers have become their bankers and inventory managers. Others will emulate
the techonomic strategies of companies like Dell or become its victims.
Free cash flow is the cash remaining after all expenses (net income plus amortization
and depreciation minus operating expenses, capital expenditures, and dividends)
including investments have been paid. Free cash flow differs from earnings
in that it accounts for capital expenses as it occurs rather than depreciating it over
many years. Free cash flow is meant to capture all real cash outlays of the present
.
Inverted cash flow describes a different concept altogether. It fundamentally
describes and quantifies a process whereby an organization receives payments for
its endeavors before it pays its suppliers. In traditional cash flow, money moves out
of a company to pay for supplies before revenues return to the company to pay for
the end product. Electronic commerce and savvy negotiation has allowed the tables
to be reversed by some key organizations, hence the development of a new
techonomic financial term,
inverted cash flow.
Let us say you want to consider using the inverted cash-flow model as part of
your overall techonomic strategy. How can it be measured and improved? A very
simple techonomic metric can be used to measure cash float for an endeavor. We
will call it
Endeavor Cash Float (ECF), the combination of time and cash flow
contained between the payment for and the costs incurred in the process of
delivering an endeavor.
The key to the ECF techonomic metric is having the systems
in place to measure the components that constitute it. ECF provides a measure for the cash flow produced or consumed from the manufacturing through the sales cycle.
Shorten the sales cycle, and the metric increases. Negotiate better terms with your
suppliers, and the metric increases. Reduce the duration for parts inventory, and the
metric increases. This metric can pinpoint where to make critical improvements to
ECF. Carefully note that the ECF metric does not indicate whether a given product
sale is profitable (it does not consider the cost of labor, cost of marketing, etc.). It
simply quantifies the time value of a product’s material cash flow as the product
moves through the procurement, production, and distribution pipeline from supplier
to customer payment. Increasing the ECF reduces, or can eliminate, the need for
capital to fund cost of goods.
The ECF sums the difference between sales price and cost of each component
times the number of days of float — that is, the number of days between receiving
customer payment and having to pay the supplier. The days of float can be positive
or negative. If customer payment is immediate and all goods are JIT delivered with
30-day terms, then the number of float days is 30, and the ECF is the sales price
minus the cost of goods in dollars times 30 days. If you are a startup manufacturer
with no supplier terms, and your channel is retail with 90-day payments, your float
is –90 days times your sales price minus the cost of goods (ouch!). Here is the
Endeavor Cash Float
techonomic metric.

Emerging Twenty-First-Century Techonomic Business Models

2007-07-01T21:35:00.000-07:00

Technologies based on the first three laws of twenty-first-century techonomics
empower us to conduct commerce and shape the organizations in new ways. New
business models are developing that were neither conceivable nor feasible a decade
ago. It is instructive to study thriving, industry-leading companies that have pioneered
new models, leveraging emerging technology into lasting economic advantage.
Some of these companies make and market high-tech items, while others do
not, but all of them use technology in alignment with twenty-first-century
techonomic trends to make numerous aspects of their business more effective,
including:

• Minimizing inventory
• Meeting specific customer desires
• Minimizing operating cash requirements
• Increasing operating hours
• Increasing number of outlets
• Deploying capital more wisely
• Globalizing production and support
• Magnifying per employee transactions
• Streamlining and focusing marketing methods
• Eliminating traditional middlemen in the sales/distribution channel
• Eliminating retail overhead
The following sections give concrete examples of successful businesses and how
they are using technology to rewrite the rules of competition. These businesses are
applying the laws of twenty-first-century techonomics to their great benefit. Others
must understand and apply the same laws if they are to survive in the competitive
marketplace.

The philosophy of supply and demand has guided free-market economic thinking
for the last two centuries, but Adam Smith developed these principles before the
advent of mass production, heavier-than-air flight, computers, satellite communications,
and the Internet. Humankind now has the ability to manufacture any product
in a quantity that exceeds demand. We can market any product to the entire planet,
and distribute any product ubiquitously, from any location. Now, deployment of
resources to provide a return on investment should be determined as much by
competitive positioning as market need. Without a strategic and defensible competitive
advantage, gains in today’s marketplace are short lived. A competitive advantage
can be continuously improved by productive utilization of emerging technology in
innovative products or in transforming the marketing and distribution channels.
Entirely new methods of cash management are also made possible by understanding
and implementing the first three laws of twenty-first-century techonomics.
Many successful companies are learning to manufacture only when demand
arises and minimize the time lag between demand and fulfillment. The dance of
supply and demand is orchestrated by wise use of technology, market positioning,
and deployment of capital. Technologies are selected based on how they support the
efficient production of products/services and defensible market positions based on
company assets (intellectual property, distribution network, trade secrets, mind share,
etc.). These defensible market positions are what Jim Collins, author of
Good to Great, calls the “Hedgehog Principle.”

The armored, spiky ball into which a hedgehog
rolls itself when threatened affords a nice metaphor for a highly defensible
market position!

As we examine the following business models, we shall use techonomic metrics
to reveal reasons for success of each business. The techonomic thought process is
embodied in this approach: study a company or organization and its fundamental
marketplace, understand how its business model functions at its core, and create a
measurable quantity that combines a technology and an economic contribution to
track the company performance. Learn to apply the techonomic approach to your
own endeavors, and you will become more effective in your decisions for deploying
resources.

THE FRANCHISE EFFECT: GROWTH THROUGH REPLICATION

2007-07-01T21:33:00.000-07:00

Here is a riddle: what is both lean and huge? Answer: a lean, widely franchised
organization. Such huge organizations do not defy the Third Law of Techonomics;
they are simply an effective variation of it. The most successful franchises take
extensive advantage of technology, allowing them to focus on their special offering
of goods and services. Each operation reduces transaction costs by collective purchasing,
and they judiciously outsource many activities to a central service core. So
they have learned how to become lean and grow simultaneously through distributed
geographic replication of efficient endeavors.

The geographically distributed franchise was pioneered in the hospitality industry
(restaurants and hotels). Geographically distributed franchises epitomize the
“think globally, act locally” philosophy. They find a need, figure out the business
model, fill the need, and then rapidly replicate their success. Each unit in the
organization — a storefront or hotel or restaurant — gets leaner and more focused
on its product/service, while the total organization grows by replication (more units
are created). Franchise organizations can grow very rapidly when they take advantage
of the technology networks now available to connect and manage them.
In addition to restaurants and hotels, many other single-purpose, distributed
operations can be viewed as a form of franchise, whether owned in whole by a
central company or in part by owner-operators.

The foundation of franchise success is to understand the key to your value and be the best at providing it.
A secret formula (KFC, Coke), an efficient infrastructure (Federal Express, United Parcel
Service), a well-financed branch structure (Citicorp, Merrill Lynch), a high-quality
service (Kinko’s, ServiceMaster), a low-price merchandiser (Wal-Mart), a focused
market leader (Walgreens, Best Buy, Staples), or any number of business catalysts
now form healthy, expanding units within a larger entity.

The techonomic advantages of the Franchise Effect include:

1. Combined purchasing power.
2. Centralized development of key systems and support technology.
3. Tested financial models and business processes.
4. Distributed operations responsibility and shared financial rewards.
5. Increasing market barriers to entry for competitors.
These advantages contribute to the rapid rise and proliferation of the franchise model
in a time when “right-sizing” is dominating the economic landscape of large, monolithic
companies (General Motors, Xerox).
Franchises outsource many of their functions to suppliers or to a central office.
Take, for example, a restaurant franchise. Restaurant architectural design, signage,
and decorations are controlled by the central franchisee, which probably contracted
out the original concepts. Napkins, plates, glasses, tables, cooking equipment, pointof-
purchase equipment, uniforms, etc. are all procured externally. Contracts for raw
food materials, waste removal, power, and sometimes even cleaning services provide
the infrastructure for the restaurant operation. The restaurant personnel are responsible
for handling the customers, cooking and serving the food, and cleaning the
tables (unless the customer does that, too). The developer of the franchise figures
out the operational and financial model initially, and then the local owner executes
to the plans. As more local operators refine the initial plans, a successful innovation
can be rapidly adopted throughout the system.

The single-minded network of owner/operators sharing experience becomes a valuable asset to the successful franchise.

In this way, one successful idea (mutation in our evolutionary model) can
be replicated thousands of times at distributed locations. The resulting overall organization
is a mammoth, but each “cell” of the organization is focused and lean. As
a result, franchised organizations are expanding in our twenty-first-century economy.

The combined techonomic power of these advantages indicate a challenging
future for one-of-a-kind “mom and pop” operations in the twenty-first-century economy.
As franchise operations effectively outsource more of their supporting activities,
they become more economically efficient than their one-of-a-kind competitors.
Less labor is required to provide the product to the consumer. In fact, many franchises
go to great lengths to figure out new ways for the customer to become the labor
force (pick up your own food: no waiters; clean your own table: no busboys; touch
screen menu entry and automatic credit card payment: no cashiers). This is incremental
Third Law techonomics, delivering the same product with less labor, by
implementing inexpensive technology or process changes.

In this scenario, the Law of Diminishing Organization Size remains true if one
views the individual franchise operator as the organization. The franchise operator’s
dependence on others for business models, inventory, designs, supplies, and even
customer labor allows the franchise unit to deliver more product with less direct
labor. In many successful operations, one measure of continuous improvement is
the steady reduction of labor per unit delivered. Locally, firm size diminishes, while
globally, the successful firm expands as more branches are added. Perhaps the best
example is the McDonald’s hamburger franchise, with over 31,000 restaurants worldwide
and over 1.5 million employees (about 50 employees per location).

Franchises vary widely in their economic structure, but they share a similar
framework of organizational success: master a local model; replicate and improve
that model regionally/nationally; require local responsibility for financial success;
provide strategic advantage through quantity of scale purchasing and shared experience.
As the Third Law suggests, outsource the supporting functions and take
ownership for the economic core of the endeavor.

COASE-DOWNES-MUI LAW: DIMINISHING ORGANIZATION SIZE

2007-07-01T21:31:00.000-07:00

In their analysis of how the Internet has impacted transaction costs, Larry Downes
and Chunka Mui extended the transaction cost analysis of British economist Ronald
Coase. Their conclusion:

As transaction costs diminish, smaller organizations evolve.
This observation will be identified as the Third Law of Techonomics:

The Law of Diminishing Organization Size.
As technology has supplied more and more “perfect
information,” reducing transaction costs and risks, it has become easier to outsource
more of an organization’s work to efficient and reliable sources, reducing
the need for internal company employment.
Let us go back to the phrase “transaction cost analysis.” Ronald Coase first
described this kind of analysis in a 1937 article entitled “The Nature of the Firm.”

In layman’s terms, transaction cost analysis is simply the make-or-buy decision.
Should I make a needed product or buy it from some external source? As individual
consumers of goods, we perform these make-or-buy decisions many times daily,
usually opting to buy more often than make, as our lives become more mutually
dependant. Corporations, likewise, continually analyze make-or-buy transactions in
order to compete economically in the free market. Coase found that many elements go into transaction analysis once a need is determined.

• Availability
• Quality
• Transport
• Punctuality
• Inventory
• Switching
• Risk
• Availability
• Quality
• Reliability
• Price
• Trust

Every day, people all over the world exchange their time for money and their
money for needed commodities. Each generation makes these decisions differently,
based on their skills, the availability of needed products, and the demands on their
time. The last 200 years in the U.S. have witnessed a huge shift in personal outsourcing
as we have moved from an agrarian society to an industrial one.

Coase studied several U.S. companies in the early 1930s. In particular at Ford
Motor Company’s River Rouge Plant, he found a monolithic (self-contained) factory
that turned iron ore into automobiles. Since Ford had pioneered mass manufacturing,
obtaining parts in the quantities needed to meet production was hard to do. He was
forced to make, rather than buy, many components.

The automobile industry in America went mostly with the make option for many
years, even though buy options were arising. If you follow the industry’s progress
through the years, you see a major shift in structural organization occurring in the
1970s. This had a lot do with the Japanese, who used outsourcing effectively to
improve quality and reduce costs simultaneously. The entire industry has now followed
suit in order to compete in the international marketplace.

If you look at the contributing factors to the make-or-buy decision, you will see
that many of them are rooted in information. The better the information, the more
accessible the information, the more timely the information, the easier it is to make
a justifiable value judgment to make or buy. More information leads to awareness
of more options.

Consider again the automobile maker. In the 1930s, there may have been only
one or two bearing makers to provide quality wheel bearings in the quantities needed
for mass-producing automobiles; same for transmissions, windshield glass, headlights,
etc. An automobile manufacturer would find a key supplier (if any), determine
price possibilities, and then decide whether to do the job inside or farm it out. The
decision was often to do the job within the company.

Now fast forward to the 1990s. The Internet is introduced. Automation and mass
manufacturing have become widely practiced skills. Virtually every component on
an automobile can be made in the quantities needed by a dozen or more suppliers.
Now the Internet provides a means to find these multiple sources, monitor their work
product, simultaneously pit them against each other to supply the same product,
switch seamlessly from one supplier to another, and transact all the financial arrangements
to the benefit of the buyer. No surprise that the make-or-buy pendulum has
swung far to the buy side. This is also true on our personal endeavors as we become
more consumer-driven and interdependent.

If organizations are getting smaller due to outsourcing many jobs previously
done “in house,” does this mean that jobs are dwindling away? Not necessarily. The
Third Law of Techonomics says there will be smaller companies, not fewer jobs. It
means there will be more opportunities for companies with a single-minded, specialized,
“value-add” purpose. These companies (if they are to evolve and thrive)
will provide their customers with exceptional goods and services, focusing on the
things they do best, the things that cannot easily be outsourced.
Several modern business practices have arisen due to the combination of “perfect
information” and transaction cost reduction. These include:

Outsourcing.
This is the common practice of buying products from an
external source rather than making them internally. As technology
advances to provide information on suppliers and the ability to remotely
monitor their production rates and quantities, outsourcing increases.

JIT (just in time) manufacturing/delivery.
JIT manufacturing networks
result from the coordination of production needs between different suppliers
to minimize work in progress and significantly reduce inventory
costs. Computer technology (Moore’s Law) combined with expanding
networks (Metcalf’s Law) makes JIT possible. And with the continuing
cost reductions in the related technologies, JIT now affords a strong
competitive advantage to those using it.

Mass customization.
Mass customization takes JIT to an extreme by
maintaining no inventory until the customer has placed a definitive order.
Using the Internet to take orders and JIT to then fulfill them, the production
pipeline holds no wasted inventory, and the producer can always use the
most advanced (or inexpensive) components to supply the customer. Computer
technology, combined with expanding networks and the ease of
using the Internet, makes mass customization a reality today.

Globalization.
Outsourcing was a local approach in the 1960s, a national
approach in the 1970s and 1980s, and has progressed to an international
approach in the 1990s and 2000s. The diminishing cost of worldwide
telecommunications brought on by the tremendous expansion of these
systems in the 1990s (the Internet telecom boom) has eliminated the cost
barrier for international communication. The oceans are crisscrossed with
fiber optic cables, and the skies (from 100 to 50,000 miles out!) are
covered with satellites. As a result, your PC service call can be less
expensively handled in India than in Indiana when the total cost of labor
and communications is considered (not to mention the increasing labor
cost of benefits). Globalization started with manufacturing and has now
progressed to service/telemarketing and software development due to the
increasing interconnectivity at lower costs (First and Second Laws). Technology
now allows the economics of worldwide personal commerce to
flourish. As a result, anticipate labor rates for transportable occupations
to level out worldwide in the generation ahead as competitive industries
empower the third world populace to embrace technology and participate
in the world economy. As Thomas Friedman correctly asserts, the world
is (becoming) flat.

Lean organization.
The lean organization results from minimizing a company’s
internal operations and layers of management, focusing on the core
value proposition of the business, and outsourcing all other activities.
Successful lean organizations understand the true nature of their “value
add,” the special quality of a good or service that makes them desired by
the consumer.

Today, we send an e-mail to Singapore, look at a Web site hosted in the U.K.,
buy a product made in China, and get technical help from a service representative
in India — all in the same day or even a few minutes.

Instantaneous, inexpensive, and ubiquitous worldwide communications are transforming the world economic order within a single generation.

The implications not only affect individual businesses,
but marketplaces, national economies, and entire global cultures.

Another way of looking at the Third Law of Techonomics for organizations is
in terms of productivity: output per employee. In simplest terms for a business, this
metric becomes revenues per employee. Whether the revenue generator is a product
or service, this metric is one that can be used to quickly determine current productivity
and annual trends in operating efficiency. As the value of this metric increases,
either the headcount is diminishing or revenues are increasing, or both. Improving
productivity is the trend predicted by the Third Law.

As this simple metric is applied to a spectrum of organizations, one should
observe a clustering of the values depending on the type of business, its capital
requirements, and its product offerings. For instance, a cleaning service with nonskilled
workers, little capital requirement, and a limited marketing overhead might
thrive with an annual revenue metric of $50,000/employee. On the contrary, a large
manufacturer with a significant cost of goods, high capital requirements, mass
marketing costs, and distribution costs might be failing with a revenue/employee
figure of $100,000. There are different ranges of this metric for different industries,
but the annual trends in revenue per employee should always be increasing if the
organization is thriving and adopting effective practices to increase productivity.
In view of the many opportunities for productivity gain, The Third Law of
Techonomics predicts that, if your organization is not continually getting more
efficient and productive, a competitor in your industry is likely to be overtaking it.

METCALFE’S LAW: UBIQUITOUS GLOBAL NETWORK

2007-07-01T21:30:00.000-07:00

Robert Metcalfe was the inventor of the Ethernet protocol, an early and successful
method for joining computers into a network. He was also a founder of 3Com. He
made the observation, now known as Metcalfe’s Law, that
the connections of a network increase in proportion to the square of the number of nodes.

Since there is great value in being connected, Metcalfe’s
Law has been commonly modified as: The value of a network increases in proportion
to the square of the number of users.

Certainly, AT&T (American Telephone and Telegraph) prior to deregulation
would have concurred with Metcalf’s Law. For nearly 100 years, each new customer
installation made their telephone line utility both more valuable and a greater barrier
to competitive entry. Deregulation of the industry and the emergence of the wireless
network removed the protection of their proprietary network.

Over the past decade, choices of telephone carriers and methods have proliferated,
and the value of the AT&T network has been significantly diminished. When
we use the Internet to send email or search for information, we are generally not
even aware of whose network we are accessing, though we may know the portal
through which we entered.

Given these observations about the diminishing value of the network as open
systems compete, what is the techonomic perspective on Metcalfe’s Law? The
essential question is: what is the economic impact of the obvious technological
creation of a global network? Near perfect access to information.
The cost of reaching anyone or finding anything on the network diminishes exponentially
with the number of users.

One can now reach or find most anything, or anyone, from almost anywhere, almost instantly.

The combination of Metcalfe’s Law and Moore’s Law has accelerated the spread
of the global network to warp speed. Kurzweil’s “Law of Accelerating Returns”
(incremental additions result in increasing returns) is the twenty-first-century inverse
of the traditional “Law of Diminishing Returns” (incremental additions result in
diminishing returns). Unlike the valuable telephone network that allowed for linear
conversations among a few captive parties, digital information is accessible via the
network in real time as well as massively storable and searchable via intelligent
methods. With over eight billion pages cataloged by Google, you do not even have
to know where to look. No more linear searches through microfilm libraries, no
more mass mailings to incorrect addresses, no more dead-end telephone calls following
leads.

In less than a decade, the world has virtually shrunk to a desktop; virtual access
to the world’s information is at your fingertips. And the cost of this access —
measured in the savings of time, postage, false dead ends, telecommunications cost,
access cost, etc. — has plummeted as technology has moved transactions from the
tangible and time-bound world (travel, postal mail, linear telephone calls) to the
virtual world (Internet, search engines, ubiquitous computing, chat rooms, nonlinear
information retrieval, virtual conferencing). Truly, if knowledge is power, we are
the most powerful people ever to inhabit the Earth.

MOORE’S LAW: UBIQUITOUS COMPUTING

2007-07-01T21:26:00.000-07:00

The cost for equivalent computing performance halves every 18 months,
OR conversely,
Computational performance at a constant cost doubles every 18 months.
Gordon Moore, cofounder of Intel, observed in 1965 that the number of transistors
per square inch on an integrated circuit had doubled almost every year. Moore
predicted that this trend would continue for some time into the future. He predicted
that the density of electronic components in an integrated circuit will double every
18 months for an indefinite period of time.

In the four decades since Moore’s prediction, the timeframe for this density doubling has been measured consistently in the range of 18 to 24 months, and this trend appears not only to be continuing, but to be tending closer to the 18-month time frame. Since the gain in density is
geometric (it doubles) in a linear time frame, the compounded results over time are
remarkable. The First Law of Techonomics is called the Law of Ubiquitous Computing
because the exponential trends in performance improvement and cost reduction
for electronics at some point makes it economically feasible to put computational
capabilities into virtually every manufactured item, from tennis shoes to
toothbrushes.

Computing capabilities are embedded in almost every conceivable product.
The number of transistors in the latest microprocessors from Intel over the last 30 years. Moore’s Law has been a strong predictor of electronic density throughout this period. Moore’s
Law is modified from a technology law to a techonomic law when additional
technical and economic observations are used. Both speed and cost of an integrated circuit are tied to its packing density.

The primary economic cost to an integrated circuit is the wafer on which the circuit is printed. Cost of these wafers is mostly a function of size, so if the wafers stay at the same size, wafer cost is fixed. The smaller the transistor size, the more transistor elements can fit on the same wafer
size. The result: more product (computational speed) for the same price as transistors
get smaller. That is why Moore’s Law can also be stated as: Computer performance
doubles at the same cost or its cost halves for the same performance every 18 months.
There are several easily understood implications of the First Law of Techonomics
(Moore’s Law Modified). Since the performance of smart electronic devices relentlessly
doubles every 18 months, what was impossible yesterday (due to either size,
cost, speed, power requirements, or intelligence) becomes possible today and commonplace
tomorrow. For example, in 1969, the computer that augmented control of
the Lunar Excursion Module (LEM) that placed men on the moon and returned them
safely to the mother ship had less computational power than the PDA (Personal
Digital Assistant) widely available and affordable today.

Not only was the LEM a little large to carry in your pocket, but it was pricy for the typical consumer.

Over the last 40 years, the implications of Moore’s Law have permeated almost
every consumer product imaginable. According to a page on the Intel website
celebrating the 40th anniversary of Moore’s Law, because of the relentless technological
and economic progress realized by electronic miniaturization, it is now
cheaper to make a transistor than it is to print a single character in a newspaper. It
is little wonder newspapers are becoming economically challenged by electronic
means of information distribution. From smart traffic lights, home lighting controls,
automobile windshield wipers, automated telephone systems, and digital watches,
myriads of products now think for themselves. This massive distribution of imbedded computation has been made possible, not just by technological advance, but by the
economic viability of the technology — the techonomics.

Many new automobiles contain upwards of 50 embedded microprocessors, and the typical American home contains hundreds of them in products and appliances.
Recall Kurzweil’s prediction in The Age of Spiritual Machines: by 2040, a $1,000
PC will hold the knowledge of the entire living human race, and its analytical powers will be enormous.

This is the implication of the progression of Moore’s Law, and it is staggering.

Techonomics at the Turn of the Twenty-First Century

2007-07-01T21:25:00.000-07:00

The first three laws of twenty-first-century techonomics develop a philosophy of
progressing organizational efficiency that is broadly applicable and personally
observable. These three “laws” form the foundation of twenty-first-century
techonomics, because these emerging technology trends are the most powerful
economic drivers reshaping today’s organizations. The first three laws of techonomics
are:

First Law — Moore’s Law (Law of Ubiquitous Computing):
Named for Gordon Moore, a founder of Intel, this widely known and validated
observation describes the diminishing cost of electronics due to technological
advance. Loosely stated, Moore’s Law predicts that the cost of
electronic computation is cut in half every 18 months.

Ubiquitous computing
results as the cost for computing capability diminishes to the point
that computers are included in virtually every manufactured device.

Second Law — Metcalfe’s Law (Law of the Ubiquitous Global Network):
As the inventor of Ethernet, one of the first practical computer
networking systems, Bob Metcalfe observed the exponential growth of
connections between computers as the number of networked computers
increased.

This growth has moved from theory to practice with the rise
of the World Wide Web. Simply stated, as the number of computers on a
network increases, the number of interconnections increases exponentially.
The law of the ubiquitous network predicts that the global network
will rapidly expand, and its access will become universal.

Third Law — Coase-Downes-Mui Law (Law of Diminishing Organization Size):
As a twentieth-century economist and philosopher, Ronald
Coase developed the theory of transaction cost analysis, the “make-orbuy” decision.

Propelled by access to near perfect information provided
by the ubiquitous network, Coase’s transaction analysis tends to the “buy”
decision. Downes and Mui predict a significant rise in outsourcing as
firms seek the most effective production means through external suppliers.

A firm’s employee count continually diminishes as production shifts
to the most efficient suppliers, hence the Law of Diminishing Organization
Size. This law can also be termed the Law of Increasing Productivity.
Techonomics incorporates these laws into a method for analyzing significant
trends that affect organizations throughout business and society.
In this chapter, these key twenty-first-century techonomic laws are described,
examples of their validity are given, and their direct effects on organizations are
discussed. However, techonomics does not end with these three “laws,” it only begins
there. Your challenge and opportunity is to learn how to observe and extend these
analysis methods to your own organizations and endeavors.

REFLECTIONS ON INTERDEPENDENCE

2007-07-01T21:23:00.000-07:00

The technology timeline indicates humanity is becoming more specialized and
increasingly interdependent. We are all more dependent on each other today than
ever before in history. The reason is advancing technology deriving efficiency from
specialization, not generalization. The main impetus in this direction came from
harnessing energy, entering the industrial age, and specialization of our work efforts.
Now we rely on the megafarm for our food, and most of us do not even know how
to milk a cow or slaughter a hog or bake bread.

This state of affairs has its up side. When more people are freed to do intellectual
work, and can collaborate more easily, technologies tend to grow, and cooperative
humanity is blessed with better medical care, food production, living conditions,
and standard of living. But interdependence has its dangers as well. Ponder the
consequences of losing our utilities (electric power, fuel, water, or telephone) for an
hour, a day, a weekend, a week, a month. How long does it take for chaos to develop?
An hour without power is just an inconvenience; read a book by candlelight or even
talk to your family. A day starts to get worrisome. The food in the refrigerator is
starting to thaw, and the hot water tank is cooling as the house reaches ambient
temperature. A weekend is now troublesome. It is time to leave and find somewhere
with air conditioning, lights, operational gas pumps, food preparation, communications
(TV, Internet, radio). If the electrical outage continues in a widespread manner
for a week, we are now desperate for food, physical comfort, and assurance that
things are being brought back to normal. I do not know if most unprepared urbanites
could make it for as long as a month. I hope I never have to find out, although the
tragedy of Hurricane Katrina offered a glimpse into these possibilities. Our modern
urban infrastructure has become so reliable as to be taken as an entitlement. It was
established and is perpetuated by the cooperative expertise and efforts of many.
Unlike the past, we are users of technologies and networks that individual users
cannot maintain. Today, technology products and systems are the culmination of the
efforts of many minds and resources, but they are only superficially understood by
their users. If the computer crashes, all most know to do is to reboot. If the car will
not start and the problem is more complicated than fuel or a battery, it is time to
call the tow truck. If the TV is inoperable, it is easier to buy another than try to
diagnose and repair it. Combine that thought with the design strategy of planned
obsolescence (a design approach that considers product failure or future feature
advancement as an opportunity to create repeat customers). You end up with a
populace running a constant race to keep more and more things operational that are
less and less reliable. At times this situation becomes most frustrating!

Our society goes to great lengths to make things inordinately easy. Velcro
replaces the skill of tying shoes. Automatic sensors turn on our faucets and flush
our toilets in public places. Food is preprocessed so that it can go directly from
refrigerator to the table with only an unskilled pass through the microwave. Constant
media access replaces the quiet imagination. The calculator and the cash register
perform all of our mathematics without our need for the skill. The need to learn
spelling is superseded by the ever-present spell-checker, and fortunately, the grammar
checker catches most egregious spelling errors.

Still — most of us of seem to think it is worth it. We are the beneficiaries of
many and vast collaborations. Technology is raising the standard of living comfort
level so high that the natural struggle that strengthens character, physique, and mind
is being diminished in our culture. Are we mentally more capable as our interdependence
avails more free time? Are there rational limits to dependency? The
metaphor of the animal within a zoo where all needs are provided may be pleasant
for a generation, but it may compromise foundational skills to the point that survival
without modern conveniences is threatened.

On a positive note, because of the advance of technology, even the poorest in
our society experience creature comforts that surpass all who lived on Earth before
the nineteenth century. Our society as a whole is more aware and able to prepare,
adapt, and respond to unexpected challenges (storms, disease, etc.) than ever before
in history. The available energy augmenting human physical capability, combined
with instantaneous global communications and expanding mental leverage, creates
opportunities for community growth that could never have been imagined by those
preceding us. Techonomics provides a key to unlocking those opportunities by
discerning judicious utilization of precious financial and human resources.

Media

2007-07-01T21:22:00.000-07:00

Media can be subdivided into two categories: mass (newspapers, magazines/journals,
theater, films, radio, television, the World Wide Web, books, CDs, DVDs,
videocassettes, audiocassettes, and other forms of publishing) and personal (personal
speech, telephone, mail, e-mail, etc.). Before the technologies of the twentieth
century, only books, magazines/journals, newspapers, theater, direct speech, and
written mail existed as media forms. Before the printing press, the offerings were
even more limited: direct speech, theater, manuscripts (hand-written texts). Douglas Galbi
postulates that the rise in media consumption in twentieth-century society is directly
related to the increase in discretionary time. As the workweek reduces, media
consumption increases to fill the remaining time. Even if your workweek is longer,
an ever-increasing number of employees have media readily accessible at the desktop
via the Internet, television, or radio.

AGRICULTURE

2007-07-01T21:21:00.000-07:00

From the first cultivation of crops allowing nomadic cultures to settle in villages,
to the recent genetic engineering of seeds, to improved yield and disease resistance,
agriculture reveals a history of productivity gain. An historical techonomic metric
for a given agricultural crop would combine the economic output (measured in
crop quantity, bushels or pounds) with the unit labor required to produce the output
(hours). One can argue that the economic value of a crop differs each year due to
market production, weather conditions, etc., but in the broad techonomic view,
the question is how technology affects productivity. Market choices about how
much will be produced are determined by economic forces that influence how
many acres are planted each year. By tracking labor productivity of a single crop
throughout recent history, one can observe the impact of new technologies on
productivity.

COMMUNITY - SIDE 4 OF THE ORGANIZATIONAL SQUARE

2007-07-01T21:19:00.000-07:00

In Danforth’s four-sided individual square, the fourth principle is the spiritual. Every
organization has a culture, a spirit so to speak, but it is difficult to quantify. Like
good leadership, you know it when you see it, but it defies exact measurement. For
this fourth side of techonomic analysis — the “spiritual dimension” of the organization
— we will focus on growth of community. Vibrant organizations, vibrant
cultures, vibrant cities tend to grow and flourish. Weak organizations, failing cultures,
crumbling cities tend to shrink and diminish.

In prehistoric times, people lived as hunter/gatherers, foraging for food wherever
necessary. With the advent of cultivated crops, people were able to settle and team
together, and the extended family village arose. The village was limited in size
(population) by the ability to grow and transport food. Further along in ancient
history, the city-state was the community heart of human organization. Currency
was invented, and trade increased. Folks banded together in cities for mutual protection,
specialized in various tasks, and cities grew. But city size was limited by
the people’s ability to provide basic needs for all citizens. The land could provide
only a certain amount of food within the limits of animate production (animal power).
Perishable food products could be transported only to local markets. Without mechanized
transportation, people could transport the large quantities of food needed to
sustain large cities only by boat. As a result, the earliest large cities developed at
the crossroads of river or ocean transportation.

The steam engine slowly removed this limitation, providing power to pump
water for irrigation, operate mills for food processing, and drive locomotives to
transport food over greater distances. Cities began to grow. Overall, societies
remained largely agrarian, but the industrial revolution developed mechanized industry.
Machinery began to transport goods, help produce crops, speed textile production,
and shape the avenues of commerce: roads, canals, tunnels.

More people could be sustained in closer proximity, hence the emergence of
large cities. Further specialization of tasks arose with increased commerce.

Community interdependence became a fact of life. The interdependence of family
was now extended to the area inhabitants, as folks relied on each other for life’s
necessities. Shopkeepers relied on farmers for their food. Merchants relied on artisans
for value-added goods. Artisans relied on farmers for raw material, and they
relied on merchants to sell their products in the market. Farmers relied on shopkeepers
for their clothes. While self-sufficiency was the norm in agrarian society,
interdependence became the theme of urban life.

This exponential growth has been accompanied by migration to urban areas. Over time.18–19
The emergence of the world’s first two cities with a population of over 1 million
people (London and Beijing in about 1800 AD) coincides with the onset of the
industrial revolution (ushered in by Watt’s steam engine in 1765). By 1900, there
were a dozen cities with a population of over a million, and by 2000 there were as
many as 430 population centers with over a million residents. The world’s largest
urban center, Tokyo, is now estimated to have over 34 million residents.20 Currently,
in Earth’s most populous urban areas, population density ranges between 25,000
and 100,000 people per square mile (Tokyo, New York, Hong Kong, Mexico City,
others). The current worldwide population density is about 110 people per square mile

COMMUNICATIONS

2007-07-01T21:17:00.000-07:00

The third side of the organizational square is communications. Communications
parallels the social side of the personal square, since through communications we
interact with others, have commerce with others, disseminate the body of human
knowledge, and learn from others. The techonomic, organizational definition of
communications refers in its broadest sense to the ability to capture information and
disseminate it to others. The evolution of communications throughout history has
been discontinuously accelerated by technology changes, the most important being
the most recent one: the Internet.

Along with the proliferation of computing, the world is experiencing an exponential
expansion of communications capability due to the expansion of the Internet.
Only a few developments in the span of history can approach the impact of the
Internet on communications. These developments include the first human speech,
the first written languages, the first alphabet, and the invention of the printing press.
In this review of communications history, we will emphasize the effect of the
mechanically printed word upon society.

It is the mechanically printed word that led to publication of more history books
than ever before, and that is what allows us to review history, including the history
of communication! In fact, before Johannes Gutenberg invented the printing press
in 1438, there were only about 30,000 books of any kind throughout all Europe.

Most of these were hand-copied Bibles or biblical commentaries. By 1500 (
less than 75 years later), there were more than 9 million books on a host of topics.
Historians differ on the exact dates at which historical eras begin and end, but
the end of the “dark ages” and the beginning of the Renaissance period can certainly
be tied to the advent of the printing press and the information explosion it set off.
More definitively, the press gave wings to Martin Luther’s 95 Theses (1517), and
the Protestant Reformation that influenced all of Western culture was under way.
Books, information, and education were no longer available to only the few, but
were economically within reach of the masses. There was great motivation to learn
to read, and the ability to leverage the sharing of knowledge increased like never
before.

But books did not originate with the printing press; they just became economically
viable for mass distribution. Writing had progressed through many phases,
including painted pictures in caves, stylized hieroglyphics carved on rocks, cuneiform
impressions on clay tablets, ink on animal skin scrolls, ink on papyrus rolls,
and ink on bound paper books. Each of these steps made writing a little easier, its
duplication a little less expensive (in terms of human labor), and its dissemination
a little wider. A techonomic metric for observing the historical progress of written
communication before the electronic age could consider many of the following
contributing elements:

1. Given the media and the language, the density of information per unit
volume made possible by the combination of written elements
2. The approximate labor time required to duplicate a written message 3. The material costs of the writing elements and transport material
4. The skill level required to produce writing and to read the results
To create our techonomic metric for an historical review of written communications,
we focus on the first two items from this list: information density per unit
volume and duplication labor. Why? Item 3, material costs, is difficult to quantify
in terms of today’s dollars. Exotic materials (gold, silver, jewels, etc.) were not
associated with common writing, although they were used for ornamental inscriptions.
Item 4, the skill level of the duplicator, required literacy. At all times throughout
history, the job of scribe required education, not just common labor.

Combining the information density as determined by characters per one square
foot (per page), incorporating the thickness of the page as a function of the material
and its binding, and then dividing this quantity by the time required to duplicate
one square foot of information, the historic techonomic metric for written communications
is obtained.

Computational techonomic

2007-07-01T21:15:00.000-07:00

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.

COMPUTATION

2007-07-01T21:12:00.000-07:00

The second side of the organizational square is computation. For most of human
history, computation has been done within the speed and capacity limits of the
individual human brain. Computation acceleration beyond human input was not
possible. While the knowledge base of the fundamentals of mathematics was advancing
throughout the ages, means of providing computational leverage for the human
mind lagged. For those interested in a detailed history of computation, Stephen
White provides a most interesting account.

The early abacus served as humankind’s only computational lever for five millennia.
It magnified human capacity by counting, carrying, and serving as a memory
device. With the discovery of the logarithm, the development of the slide rule was
made possible in the first quarter of the seventeenth century (William Oughtred,
1625). The next major advance was the mechanical calculator using gears and
mechanisms to perform addition, subtraction, division, and multiplication (first mass
produced by Charles de Colmar in 1820). Although human input was still required
to initiate each calculation, some speed advance over unaided human computation
was achieved.

Charles Babbage (1792 to 1871) provided a big step forward as he conceived
the fundamentals of computing machines — machines that could be programmed
to execute many computations without further human intervention. Babbage conceived
numerous mechanical computers with innovations including memory, punchcard
programming, and conditional jumps. His mechanical designs provided the
conceptual foundation for the electronic computers that followed a century later.

Observing the computational speed of these methods throughout history, one
realizes that the computational lever for the mind was very limited until systems
were developed that used electricity as the basis of operation. One ancillary
techonomic observation is that mechanical development of a process often precedes
electronic development — the physical implementation precedes the virtual. In a
way, things are understood in the tangible world before they are implemented in the
electronic world. The invention of the vacuum tube by Lee DeForest (1906) was the
gateway to electronic computing. Once an electrical representation for mathematical
operations occurred, the speed of computation increased by orders of magnitude,
and eventually the cost per computation decreased even more dramatically.

One of the first digital computers, the ENIAC (Electronic Numerical Integrator
And Computer) could perform 50,000 simple additions or subtractions per second.

The ENIAC was developed during World War II, representing another example of
military demands driving rapid technological development due to absence of economic
constraints. Early use of ENIAC included calculations related to projectile
paths and supporting calculations for the hydrogen bomb. While ENIAC was unreliable
due to the thousands of vacuum tubes required for it to operate, it ushered in
the era of electronic computation, and the lever for the mind was unleashed. By the
way, ever wonder where the word “debug” came from? To modern computer programmers,
it means fixing a computer problem by correcting errors in computer
code. It originated with the early, mammoth-sized, relay-driven computers. Moths
would get into the circuitry and cause malfunctions, so computers had to be cleaned
out to function properly: debugged.

The speed and miniaturization of computation has been on a rapid rise ever since
the days of these early computers.

Physically ENIAC was a monster — it contained 17,468 vacuum tubes, 7,200
crystal diodes, 1,500 relays, 70,000 resistors, 10,000 capacitors and around 5 million
hand-soldered joints. It weighed 30 short tons (27 t), was roughly 2.4 m by 0.9 m
by 30 m, took up 167 m and consumed 160 kw of power. As of 2004, a chip of
silicon measuring 0.02 inches (0.5 mm) square holds the same capacity as the ENIAC.

The development sequence and interactions are worthy of note. For eons,
advances in computational capabilities were nonexistent, but the body of knowledge
of mathematics and processes continued growing. The harnessing of electricity led
to many discoveries and products, including the vacuum tube in the early twentieth
century. Advances in vacuum tube and computer technology were slow at first; the
boost came via a wartime effort requiring significant computation. The war prompted
focused research and development in practical and applied electronic computation.
Analog computers, requiring hardwired programming for each problem, appeared
first at the turn of the twentieth century. In response to military needs, a new category
of digital computers emerged, exemplified by ENIAC, and computational capabilities
were increased by orders of magnitude.

Next, the slow, steady road to commercial applications began. Commercial
requirements demanded higher reliability and reduced cost for general applications.
At mid-century another military race began, the space race, and the need for miniaturized,
light-weight, and reliable computing for space vehicle control fueled
advancement. Related technological developments emerged (transistor and integrated
circuit) directly addressing size (miniaturization), operating environment
(reduced power consumption and heat load, increased component reliability), and
programming flexibility (high-level software languages). With each related technology
improvement, more commercial applications became economically viable.

In a nonintuitive twist, the Soviet Union had superior rockets reducing their need to
limit the weight and size of the electronic control payload. As a result, there was
less motivation to miniaturize electronic circuitry — a need that drove the U.S.
program and subsequently resulted in the birth of the U.S. microelectronics industry.
These advances found their way into the commercial mass market a decade later
with the introduction of the personal computer.

The journey of computational progress accelerated, as the technology was now
in the hands of the masses, creating economic opportunities for innovations, both
in hardware and software. With more commercially viable applications, economies
of scale reduced hardware manufacturing costs dramatically, and a growing body of
knowledge related to software solutions became available. The geometric expansion
of worldwide computational capacity, initiated by the military-backed development
of ENIAC, continues into the twenty-first century with little sign of slowing.

Before the dawn of electronic computing in the 1940s, the speed of human input
constrained the computational performance of the limited methods available. After
the 1940s, the invention of the transistor and the integrated circuit created an everincreasing
performance metric for computation. Even in the absence of an economic
component, one can easily observe the significant increase in computing power
afforded by the emerging technologies.

A second metric, combining the impact of improving computational speed with
the cost reductions that have accompanied these advances, provides a techonomic
perspective on computational advance. While the speed of various technologies has
increased exponentially over the past 50 years, implementation costs have simultaneously
decreased. This has been due to the economics of implementation (aided
by mass production), reduced material requirements, reduced energy requirements,
and improved reliability. Combining the advance in technological performance with
reduced implementation cost yields a complete techonomic metric of the advance
of computational capabilities available for commercial applications. This metric is
closely related to Moore’s Law, which predicts that the cost of
equivalent computing performance halves every 18 months.

About Energy

2007-07-01T21:04:00.000-07:00

We can find information for delivered fuel cost from numerous sources, but
conversion costs vary widely based on application requirements.

The smaller/simpler the application, the less our fuel selection decisions are affected by conversion cost. For instance, conversion capital requirements and operating efficiencies for
personal home heating vs. central electric power generation are substantially different.
Given fuel prices and conversion unit efficiencies for home heating systems, we
can easily compare techonomic metrics based on the annual cost of heating a home.

These metrics cover the major financial elements of fuel and conversion, but
they do not consider environmental effects. In an unregulated system with no environmental
constraints, considering only the price of energy required for the desired
service finishes the evaluation. However, in most contexts, we must certainly consider
environmental factors. For a central power generation facility, environmental
and operational regulations are playing an increasingly prominent role in fuel selection.
Unknown costs of regulation (nuclear) and changing environmental requirements
(coal) have shifted fuel selection for new generating capacity in the U.S.
over the last two decades to different sources (natural gas).

The Three Mile Island accident (1979) and the Chernobyl accident (1986) halted orders for new construction of nuclear power plants in the U.S. A nuclear-powered electric generating facility
has not been built in the U.S. in the last 20 years. The economic uncertainty of
regulatory, safety, and licensing expenses has lead to the demise of the domestic,
commercial nuclear industry.

However, this has not been the case worldwide. France, for example, now
generates over 75% of its electricity from nuclear facilities with a standardized
design that reduces uncertainties. In 2000, there was as much electricity produced
from nuclear energy as was produced from all energy sources worldwide in 1961
(2438 billion kilowatt-hours.)

Similar environmental challenges, resulting in economic and regulatory uncertainty,
are also evident in the use of coal for electricity generation. Particulates,
sulfur dioxide, nitrous oxides, and greenhouse gasses are all contributors to air
pollution that are being regulated to protect the environment. The emission targets
are not stationary and are becoming increasingly tight as environmental effects
become better understood and environmental lobbies gain political power. Over the
past decade, the U.S. has shifted toward natural gas for electric generation because
it provides the least risk in the environmental/economic equation — even though it
is more suitable for many other, more demanding (mobile and chemical production)
applications.

Here is a clear example of the techonomic metric yielding an answer in a
nontraditional manner, by revealing the contributing areas that cannot be numerically
evaluated.

This is RISK. Whenever there is a strong contributing element to a
techonomic metric that cannot be reasonably estimated, the risk to making a
resource deployment is considerable.

If a government determines that it wants to
create an environment of uncertainty for use of a technology like nuclear power
generation, or any technology, then that industry will not advance in that country.
Likewise, if a government creates an environment that clarifies and supports the
application of a new technology — like France did for nuclear power generation —
then the industry will advance quickly. France now has 58 nuclear reactors, and they
provide about 77% of the country’s electricity. In 1973, France was relying on
traditional fossil fuels for over 80% of its electric energy needs.

The forces of economics ultimately enter the global marketplace, as indicated
by the words of the late Indian physicist Dr. Homi Bhabha, “No energy is more
expensive than no energy.”

ENERGY: SIDE 1 OF THE ORGANIZATIONAL SQUARE

2007-07-01T21:02:00.000-07:00

As our review of military history pointed out, for the better part of 5,000 years,
animate labor provided most of the energy for human endeavors. With the minor
exceptions of wood burning for heat and cooking, waterwheels for grain grinding,
windmills for water pumping, and isolated uses of coal and natural gas, the world
ran on animate labor (humans and animals).

Energy development can be summarized by major technological impacts: discovery
of fire (prehistory), development of external combustion engines (typified by
the steam engine, 1750 to 1770), development of internal combustion engines (typified
by the automobile engine, 1870 to 1890), commercialization and mass distribution
of electricity (1910 to 1930), and harnessing of nuclear power (1940 to 1960).
Each of these major developments changed both the living patterns and the fundamental
fuel sources/requirements of society.

The invention and application of the steam engine (1765) increased energy
consumption dramatically, providing physical leverage far beyond animate labor.
Early in the twentieth century, two additional energy developments, electricity and
internal combustion engines, allowed large quantities of energy to be distributed to
the populace and provided transportation for the masses. These technologies
increased fuel consumption for predominantly hydrocarbon-based systems.

The most recent key development in energy is nuclear electric power generation, providing
even greater energy density and generating capacities to meet the needs of growing
communities. An energy techonomic metric for an historical perspective tracks per
capita annual energy consumption through the years. The greatest increases in per
capita consumption have occurred as new technologies made it possible to consume
greater amounts in the pursuit of improved standards of living. The TM for energy
increases coincident with the spread of steam power, the deployment of internal
combustion engines and the availability of electricity.

Harnessing energy to magnify human effort brought many related changes to
society. Transportation, construction, agriculture, military endeavors, and ultimately
computation were transformed by the availability of copious and new distribution
forms of energy. As portions of the populace were freed from physical labor, mental
endeavors increased — which in turn resulted in further technologic advances.
Techonomic metrics for comparing current energy production methods must
consider many elements, including:
• Fuel cost (unit energy costs for extraction, transport, refinement)
• Conversion cost (unit energy costs for plant capital and operations costs
to convert fuel from chemical/nuclear form into mechanical or electrical
energy)
• Environmental/regulatory cost (unit energy costs for environmental protection
of air, water, or containment of waste products)
• Mobility factor (suitability for stationary or mobile applications)
The sum of the fuel cost, the conversion cost, and the environmental cost per
unit of delivered energy provides the comparative techonomic metric for energy.
The mobility factor is a “go” or “no go” determination of fitness for an intended
purpose.

AN EXAMPLE: DIGITAL PHOTOGRAPHY TECHONOMIC METRIC

2007-07-01T21:00:00.000-07:00

I had a deep interest in digital photography, since the transition from film to digital
was the key to ease of use for mass producing the iPIX 360°
image.

Without economical digital cameras, the iPIX process required labor-intensive film scanning
to produce an immersive image. In the early 1990s, few digital cameras would satisfy
our resolution needs, and none were in mass production. We required a two-megapixel
minimum image, a camera under $1000 for mass distribution, and a special
lens to capture a wide field of view (fisheye) that was not typical of anything on the
market. We lacked resources to develop the whole camera, but we did have the
resources to develop the lens when the “right” cameras became available. Moore’s
Law was progressing, so it was only a matter of time before the cameras would be on the market.

But when?
Specifically, when would we need a fisheye lens for our process that would allow
digital production of 360° images, greatly reducing the labor content for the iPIX
process? An accurate answer to this question was critical to the timely deployment
of our limited resources.

THE TECHONOMIC SWEETSPOT

2007-07-01T20:57:00.000-07:00

It is not sufficient for a new technology to simply work. It must work at a price
the market will embrace. Great new technology takes the market in one of two
directions. Either it opens a new field of endeavor (like space exploration), or it
makes common practice endeavors that were previously accessible only to the elite
(such as telegraph for distance messaging).

Sometimes, great technology simultaneously opens new fields and rapidly becomes economically accessible to the masses (like books from the printing press). A great technology is so compelling that, as we look back in history, its introduction and massive application appears to coincide.
What distinguishes a great technology from the merely good one? Significant
increase in benefit vs. cost over other existing approaches is the indicator of a
breakthrough technology.

As the techonomic metric increases, the potential for market acceptance of the endeavor also increases. While there are many good ideas and good opportunities, the great ones lie in the region where both performance and value proposition are significant — and coincide. When
we survey opportunities for resource deployment, this region of greatest opportunity
is the area to seek.

In the formative years of my company, we developed a video camera system that
performed image pan and tilt without any moving parts. This device used electronics
to select and correct the portion of interest from a wide-angle fisheye lens. Our first
commercial deployment of the system was targeted at video security applications.
The system required $3700 of electronics to perform the image processing for a
standard video signal (NTSC 640×480 pixel resolution image quality). The product
had two shortcomings in its first embodiment: it cost too much relative to competing
mechanical systems, and its resolution was not sufficient to see clear details from
segments of the images. While these items are obviously important, we had conquered
hundreds of other challenges just to get the product to the marketplace. But the
marketplace could not care less about what obstacles we had overcome. The marketplace
cared only about performance at a competitive price. In its purest form, the
market is a rational, unemotional filter for performance and cost.

After a good introductory quarter for the product (the distribution pipeline filled),
we had a dismal second quarter, and it was evident that we had to refine our offering
or cease to exist. Timing coincided with the earliest popularization of the Internet.
A company called Netscape had just provided the first massively utilized browser,
and personal computers were connecting to the Web everywhere. In adapting our
product to this new environment (the Internet), we recognized the opportunity to
provide a similar function for mass distribution over the Web at a much-reduced
cost to the consumer. By using other people’s electronics (personal computers rather
than our own electronics) and distributing software over the emerging network (the
Internet), the capability to pan, tilt, and magnify a 360°
image was provided at a fraction of the original hardware cost.

In the first hardware-based system, old image transmission standards for television
limited the resolution of the captured image and resulted in a limited-quality display
for the end user. Transforming from the old standard (NTSC video signals) to the
emerging distribution network for digital images on the Internet, much higher resolution
input images were possible, improving the quality of the result. Using scanned
photographs rather than video, we were able to increase the resolution 4 to 8 times.
Technology provided multiple order-of-magnitude improvements in both cost and
performance, moving the product much closer to the techonomic market sweetspot.
Using software rather than hardware, we were able to reduce delivery cost to the end
user from $3700 hardware to a few pennies per download, while simultaneously
improving the resolution 4 to 8 times. Revisiting the performance/cost relationship,
these combined developments improved the performance proposition 6 to 7 orders
of magnitude and eliminated the need for closed-circuit system operation. This tremendous
shift in the performance/cost relationship for the experience delivered to the
customer was the key to refocusing our resources. The product was later named iPIX
and continues to be widely used for interactively viewing 360°
images of homes, automobiles, apartments, and resorts on the Internet.

Creating Techonomic Metrics

2007-07-01T20:36:00.002-07:00

A techonomic metric (abbreviated as TM) is a data measurement that provides insight
into trends by combining the impact of technology advance on the economics of a
given endeavor. This chapter extends your understanding of this process by
constructing TMs for the four historical pillars of organizations revealed in the
preceding technology timeline. The TM is a means of comparison for an endeavor
in one of several ways:

1. Trends for an endeavor over time: A TM can monitor the same endeavor
at different points in time, revealing the impact of technology and economics.
For example, how much did it cost to distribute information via
a book at different periods in history? Techonomic metrics reveal the
telling example of the ancient $300,000 Torah, today reduced to the $0.85
Gideon Bible.

2. Different technical approaches to the same endeavor: A TM can provide
measurements of two competing approaches to the same endeavor, for
example, how much it costs today to distribute information via a traditional
book, or CD-ROM, or online.

3. Different cultural approaches to the same endeavor: A TM can provide
measurements for performing the same endeavor in different cultures
based on infrastructure, labor costs, transportation costs, communication
costs, etc. For example, how much does it cost to distribute information
to most of a society’s population via the infrastructure available?

A good techonomic metric includes components of technological performance
and economic cost for all key elements of the endeavor. To be actionable, a TM
should be objective, and the data upon which it is constructed should be verifiable.
When historic data is used that precedes contemporary currency (i.e., dollars prior
to ~1930), the economic component of the TM should be based on a definable
economic quantity, such as labor hours, land utilization, or individual human capacity.
A useful TM will reveal a trend for a complex endeavor in simple, compelling
terms. It may also clearly reveal where a technology breakthrough will move an
endeavor from the experimental realm to mass acceptance because of cost reductions
or performance enhancement.

technology timeline

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The technology timeline groups major advances by energy, computation, communication,
community, and military. The phasing of these developments partially
reveals how they are built upon each other and push each other forward in a
continuously advancing spiral. Communication advances lead to energy discoveries
that lead to community advancement that results in more energy discoveries/needs
that lead to computational development that results in communication advances.
Military research appears to be a key impetus for the cycle, since it occurs outside
the typical constraints of competitive economic pressure. It is driven more intensely
by competition to defend/conquer.

Organizational Evolution Resulting from Technological Advancement

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The individual attribute of the mind is mirrored by the computational capability of
society. Surveying history, we see numerous developments in the understanding and
implementation of mathematics. From numbers to represent counting, to geometry
to track heavenly bodies, to the abacus, the electronic calculator, and the computer,
mankind has made progress in leveraging mental capabilities to pursue human
endeavors. In very recent history, the electronic computer has become a lever for
the mind in the same way that harnessing steam power, internal combustion, and
electricity became levers for the physical body.

The ramifications of mental leverage
far surpasses the implications of physical leverage.
While physical leverage helps us subdue our environment, thus freeing up time
for other pursuits, mental leverage provides us the ability to work together in new
ways. Mental leverage enables us to discover new horizons never before possible
(consider advances in recombinant DNA research, particle physics, and astrophysics).
We can now create machines and processes that actually are used to create the
next, more advanced generation of machines and processes.

Technology has become the partner of imagination to reshape the world.
Richard Sennett, in his book The Culture of the New Capitalism,
states the implications of this advance in technology
capability directly: “By the 1990s, thanks to microprocessing advances in electronics,
the old dream/nightmare of automation began to become a reality in both manual
and bureaucratic labor: at last it would be cheaper to invest in machines than to pay
people to work.”

In his book The Age of Spiritual Machines, Ray Kurzweil projects the computational
capabilities that might be expected if electronic developments continue to
advance at a rate comparable to the last 40 years.

He anticipates that a $1000 personal computer in the year 2020 will have enough memory and computational capability to store and take action on all the life experiences of a single individual
(sights, sounds, thoughts, etc.). He further projects that, if current trends continue,
that a $1000 personal computer offered in the year 2040 will be able to store and
take action on all the life experience of all people living on Earth at that time! Even
if Kurzweil is wrong in his exact timing or magnitude, the trends are evident, and
the implications are staggering. In some ways, they are already coming to pass
through the power of one system (the Internet) to access all systems.

The individual attribute that Danforth calls the social side corresponds to communication
from the technology perspective of the organization. Communications provide
the foundation of interaction that sustains cooperation in an organization.
Organizational communication has evolved in many ways as technology has brought
about change through new possibilities. Through the ages, most enterprises were
small because they required personal interaction to sustain focus and provide direction.
This began to change in the nineteenth and twentieth centuries as technology
provided new ways to communicate: newspaper, telegraph, telephone, radio, and others. Now organizations had methods to communicate across distances without
great time delay, and new organizational principles could be enacted.
Technology continued to advance, now at greater rates because larger numbers
of people could collaborate in its progress.
Organizations could now expand their
boundaries, no longer bound to word-of-mouth communications in a single location.
In the early days of my career, common management practice was to place project
teams in close physical proximity to maximize the interchange of ideas and
strengthen cooperation. This was true when the most efficient form of communication
was direct conversation: a stop by the office or a face-to-face meeting. With the
advent of e-mail, voice over the Internet, teleconferencing, and video teleconferencing,
the cost of communicating and monitoring remote operations has so diminished
as to revamp management practices. With no financial communications barrier to
outsourcing efforts, organizations are tending to globalize their operations at an
increasing rate, seeking cost-effective labor wherever they find it. Survival of the
fittest organization, in a competitive world, compels organizations to find the best
match between quality and cost to meet their production and labor needs. Cheap
and instantaneous communications have eliminated the global barriers to entry for
mental labor and for many forms of manufacturing labor.

A Techonomic Perspective of History

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In 1986, I started a small technology company called TeleRobotics International,
Inc. I had recently left a national laboratory to start on a journey with an unknown
destination. In hindsight, it is amazing to consider how many of today’s common
business technologies we did not have then.

We did not have a cell phone. We did not have a fax machine. We did not have
a Web site. We did not have a local area network. We did not use e-mail. We did
not have an inkjet printer. We did not have a CD or CD reader, burner, or player,
much less a DVD. We did not have a color computer display because we did not
have a color computer. Overseas telephone calls were measured in dollars per minute,
not cents per minute. We did have a hard drive — bigger than a breadbox and holding
all of 10 megabytes! And we invested in a used laser printer costing more than the
rest of our office equipment and computers combined.

It was not that we were too small and too poor to obtain these things. Well,
actually we were too small and poor, but the main reason we did not have those
devices is because they were not widely available. All of those commerce-supporting
technologies were either invented, perfected for mass use, or cost reduced for wide
distribution in the past 20 years.

From the perspective of eternity, 20 years is a very
short time. From the perspective of business, 20 years is an eternity.
Reread the list of “did not haves” and think about your daily business endeavors. Your organization would be noncompetitive if all these devices were removed from your office.
In fact, you might be behind if only one of them was removed from your business
today!

TECHONOMIC METRIC PROCESS

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• Determine major technical contributors to performing an endeavor.
• Determine a consistent cost measurement for the delivery of the endeavor.
• Combine the technology performance with the delivered endeavor cost to
create a single metric (typically: unit/$).
• Track techonomic metric over time to monitor evolution of the endeavor.
• Techonomic metrics are most valuable when:
1. They broadly address all important contributors.
2. Subjective data are minimized.
In periods when technological change is slow, market forces of supply and
demand control the economy. But in periods of rapid development, technology
revolutionizes production methods, resulting in enormous economic efficiencies and
organizational impact. The fundamental purpose of techonomic analysis is to be able
to spot trends that lead to success in the marketplace and also use understanding of
those trends to determine when to enter the marketplace. In the following chapters
we will use history as a teacher of techonomic trends and develop techonomic metrics
to predict those trends into the future.

DEFINING TECHONOMIC METRICS

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One key element of this book is to demonstrate how to develop a techonomic metric.
A metric is a key measurement that is used to monitor the progress of a system.
The amount of gasoline in an automobile is an example of a key metric frequently
monitored by the driver to determine when refueling is necessary. As the fuel gauge
moves from full to empty, there comes a point in time where the operator needs to
take action to refuel. The timing of the refueling decision may have many other
contributors (availability of refueling stations, capacity of the fuel tank, fuel efficiency
of the vehicle, even the accuracy of the fuel gauge itself), but the simple,
trustworthy fuel gauge is the primary metric used by the driver to decide to refuel.
Techonomic metrics for the marketplace are similar to the fuel gauge for the
automobile, with the additional proviso that they measure a set of factors governing
both technology (performance) and economy (cost). Continuing with the automotive
analogy, a techonomic metric would divide the vehicle fuel efficiency (miles/gallon
or km/l) by the cost of fuel ($/gallon or $/l) to create a techonomic metric of vehicular
operating efficiency (miles/$ or km/$). Increase the fuel efficiency by better design
(lighter weight, reduced aerodynamic drag, etc.) or decrease the fuel cost by using
an alternative source, and the techonomic metric will increase. Techonomic progress
for a single fuel type (i.e., gasoline) can be measured over time, or a techonomic
comparison of the best practices for two different fuels can be simultaneously
compared (i.e., hybrid-electric vs. gasoline). Good techonomic metrics provide a
value that can be consistently determined by different observers combining technology
and economic information into a single observable quantity.

To qualify as “techonomic,” a metric must include data for both performance (technology) and
price (economy) into a single quantity representing key elements of the endeavor
being monitored.

Understanding any marketplace requires observation of the key transactions
related to endeavors.

Transactions expose the societal value of endeavors allowing
their observation.

Once the significant contributors to the performance and cost of
endeavors are determined, the next step is to consider how shifts in technology affect
those key contributors. Technology may affect production, distribution, source location,
financial exchange, publicity, shelf life of goods, or a host of other factors that
ultimately determine the quality/cost proposition provided to the end user.
In bullet form, here is the simplified thought process for developing a techonomic
metric for a give marketplace endeavor:

Find the technology and economic components required to deliver the
fundamental endeavor in the market and combine them into a techonomic
metric.
• Gather historic market data for the technology and economic components,
paying close attention to any major shifts relative to technology introductions
that have affected the techonomic metric. Where historical data in
terms of dollars are not available, consider the use of a timeless economic
equivalent such as labor hours, land mass, or production speed.
• Project the effect of emerging technologies or economies of scale on the
future of the techonomic metric.
• Visualize key technological opportunities that could restructure the
techonomic metric for a given endeavor.
This process seeks insight into the timing and magnitude of the possibilities as
well as the magnitude. Once we have established the techonomic metric established
for a given endeavor, the relationship between technology advance and economic
results is defined. But it is also critical to understand that the time required for the
technology to impact the marketplace is critical to the wise deployment of resources.
How many failed entrepreneurs lament that they were 5 years ahead of their time?
The desire is to be 5 minutes ahead of your time, utilizing new technologies to
master a receptive marketplace. Advances in mass communications have increasingly
made the marketplace adoption of technological developments more rapid. Often,
the determining factor of the market readiness of a new technology is the cost for
widespread deployment.

The cost acceptable to the marketplace may not be the initial cost that a supplier
can offer profitably. As a product gains market share, economies of scale in production
and distribution enable cost reductions in the product that were never imagined
by the original developers. In
Crossing the Chasm, Geoffrey A. Moore elegantly
describes the reducing cost curve for new product introductions as they find an everincreasing
market.

Increasing market presence allows mass production techniques
and spreading of development costs over a larger product base, thereby reducing the
product price.

The reduction of production costs is most evident in the field of electronics. An
embedded (self-contained) control system for the first generation of a product may
be cost prohibitive but required to become the first to market. A loss-leader price
may be required to capture the initial marketplace, but the combination of quantity
production and progressively diminishing electronic costs may ultimately reward
the successful first mover as the marketplace embraces the product.
Before finishing our discussion, let us note
techonomic metrics can be used for
comparison of different categories of information depending on the insight sought
.
Metrics may be applied to simultaneous operations at different locations or using
different processes to discover and understand the best approach for an endeavor.
Metrics may be applied to the same endeavor at different points in time to determine
how technology changes have affected the endeavor or might affect it in the future.
In the end, the metric is only as good as its components and the data used in its
calculation, but the value of including functional and financial information in an overarching measurement is the key of techonomics. This framework provides
a point of observation giving perspective and insight into diverse and complex
decisions.

THE IMPORTANCE OF “PERFECT INFORMATION”

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Information has many characteristics that govern its value. Information is “perfect”
when all these characteristics are not just optimized, but have reached theoretically
ideal limits. Important information characteristics include:
•
Accuracy.
Accuracy determines the credibility of the information. Is it
correct? If it is a measurement, is it from a working, calibrated instrument,
and is the variation between measurements small enough to be inconsequential?
“Perfect information” is characterized as trustworthy, precise,
and actionable.

Timeliness.
Old information may not be actionable. Last year’s holiday
unit sales for personal computers may not have any relationship to the
inventory requirements for this year’s PC industry. If one producer bases
production on last year’s demand while another determines production
from current online orders, the timeliness of information will greatly favor
the second producer in determining production requirements. The world
of just-in-time manufacturing runs on accurate and timely information.
“Perfect information” is instantaneous and actionable.

•
Cost.
Many components determine the cost of information. The most
significant information costs are

1. Origination/access cost: How much does the information cost to obtain
and access? “Perfect information” is obtained at no cost.
2. Transmission cost: How much does it cost to get the information from
its source to its destination? “Perfect information” is transmitted at no
cost.
3. Searching cost: How much does searching for the information cost?
Depending on how information is organized, searching can be expensive
and time consuming. The advent of search engines has transformed
the slow linear search into a rapid direct access approach. “Perfect
information” is located at no cost.
•
Completeness.
Complete information provides the entire picture of the
endeavor in question. Partial information, even when accurate, timely, and
free, can leave gaps in understanding. Remember John Godfrey Saxe’s
poem about the six blind men believing they were describing the whole
elephant?

As each blind man laid hold of a different part (one man felt
the elephant’s side and confidently declared the beast to resemble a wall,
another grabbed the trunk and thought the elephant very like a snake, and
so on), their perception of the elephant was completely different. “Perfect
information,” unlike the reports of the blind men, reveals the entire elephant.
“Perfect information” is omniscient.

Consider what a great decision maker you would be with perfect information.
You would have trustworthy information, instantly, at no cost, from all possible
credible sources available.

In the history of information, the Internet provides a
closer approximation to perfect information than has ever been available to
humanity
— if only the Internet were completely credible and trustworthy! As things
are, you still have to separate the wheat from the chaff. The glut of information can
also be a problem as you seek information on simple endeavors and are swamped
with thousands of possibilities, many of which are not valid or relevant. But the
advent of the Internet, in combination with search engines like Google and Yahoo,
has permanently changed the way we access information and make decisions. From
linear to nonlinear, slow to instant, physical to virtual — the Internet has changed
information access, guiding it toward the “perfect” ideal. Orders of magnitude more
data are available today, in a timelier manner and at lower cost, than just 10 years
ago. This sudden, ubiquitous availability of nearly “perfect information” is more
important to the future of the fundamental organization of society at the dawn of the twenty-first century than the discovery and harnessing of electricity was to the
twentieth century.

The techonomic ramifications of “perfect information” are now taking effect.
Techonomic metrics,
used in concert with perfect information, allow the tracking of
trends in key endeavors. To observe techonomic effects in your endeavors, it is
important to understand the process used to create a techonomic metric.

HIDDEN TRANSACTION COSTS

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In an uncomplicated and trustworthy world, cost for any item would be expressed
with one clear, comprehensive attribute — the price tag. You would simply ask
yourself what is the best price for the item you require. Often, this is the first question
considered, and if the cost is too high from external sources, the decision runs to
making the product internally (i.e., the common decision to make rather than buy
food in the third world).

But our world, especially the industrialized “first world,” is anything but simple,
and transactions of any kind can have a number of hidden costs, some of which can
be devastating if not fully considered.

These contributors to transaction costs are
referred to as “hidden” because they are not as easily quantified as the price tag,
even though they may be more fundamental to the ultimate value of the purchase.
A sample of hidden transaction costs includes:
•
Availability:
Before one can buy a product, one must locate a satisfactory
supplier and then set about the process of negotiating and contracting with
that supplier. Does the product exist in the form desired? Will the provider
sell to your enterprise? Each of these steps requires information, communication,
and trust to determine if the transaction is worthy and the supplier
reliable.
•
Quality:
Fitness for intended purpose has many facets, such as specification,
inspection, terms, and rates of rejection, and the cost of customer
returns both in actual terms and in lost future opportunities.
•
Transport:
It is one thing to buy a product, it is quite another to pay to
have it moved. Some products are easily transported (software over communications
systems), while others are bulky or perishable, requiring
proximity in their production (for example crushed rock, medical isotopes,
fresh produce). Goods in transport represent an inventory cost that impacts
the total transaction cost.
•
Punctuality:
A product may be of perfect quality and inexpensive price,
but delay in its delivery could close down production at a multimilliondollar
facility. Such costs must be considered as risk in the make-or-buy
decision.
•
Inventory:
One must decide how making or buying a product will affect
inventory. Inventory requirements are a part of the capital needed to
produce and deliver products, as well as tax consequences.

Switching:
Switching costs (the costs associated with “switching” to
another supplier) can mitigate or amplify the impact of other transaction
costs. If switching costs are low (other quality sources, easily accessed,
instantaneously available, etc.) then the consequences of other hidden
transaction costs can be reduced because a secondary supplier can be
readily obtained if the primary source fails to deliver. If the switching
costs are high (sole source, proprietary formulation, unknown quality,
distance), then the consequences of other hidden transaction costs are
amplified.
•
Risk:
What are the organizational risks involved with outsourcing a particular
endeavor? Risk could be financial (production outages due to
supply interruption), strategic (lost trade secrets), or relational (conflict
of interests with other partners). If the risk is too high, the financial gain
from outsourcing might be overshadowed by the potential risks associated
with a certain path.
•
Others:
A number of other factors — trade laws, regulations, tariffs, etc.
— may determine complete transaction costs for any endeavor. Your own
situational analysis will uncover these.

Figuring out many of the hidden transaction costs boils down to quality and
availability of information and the trust you can place in the reliability of that
information. Long-standing relationships are often worth a premium price due to
the trust garnered through the years. As global competition has increased, competition
in the marketplace has forced lower-priced alternatives to be considered. Likewise,
the combination of the Internet and electronic commerce has allowed new
sources for supplies to be located, considered, quoted, validated, surveyed, and used.
The falling cost of telecommunications has made it economical to connect distant
manufacturing systems in order to monitor production rates, shipments, key quality
measurements, and payments.

Today, it is as easy and potentially more cost
effective to perform these tasks across the world as it is to do them across town. All
these technological changes have reduced the transaction costs for outsourcing
production. Monolithic manufacturing facilities are rapidly yielding to manufacturing
networks that are centrally monitored, but geographically decentralized. The
ideal of “perfect information” plays a key role in reducing hidden transaction costs.

TRANSACTION COST ANALYSIS: THE MAKE-OR-BUY DECISION

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The economic field of transaction cost analysis looks at make-or-buy decisions. The
make-or-buy decision considers whether a transaction is more economically performed
internally (make) or through external sources (buy). We all analyze transaction
costs many times a day, often without even considering what we are doing.
Sometimes the decision is obvious, sometimes not. Did you make your lunch today
or buy it at a convenient restaurant? If you made your lunch, did you grow your
own tomatoes? Bake your own bread? Make your own butter? You probably bought
your lunch or bought the components of your “homemade” lunch, but it has not
always been that way. Turn back the clock a few generations in the U.S., to the
agrarian society. In that age, there were many more make than buy decisions. Living
then was not, generally, as easy as now, but personal independence was much greater,
because there was less reliance on external supplies for basic necessities. Observe
today what happens in large cities if a power outage extends more than 2 days
because of weather or system failure. Communication is limited or curtailed, pumps
do not work (limiting water and fuel supplies), and food supplies begin to dwindle.
Without electric power, many of our “buy” decisions are interrupted. The interdependence
of modern civilization begins to fray at the edges.

Or travel to the third world today and see people taking care of their own
fundamental needs. Rural economies in most of the world provide a subsistencelevel
existence; people live off the land. Their meager existence is balanced by
considerable independence for the fundamental necessities of life. Third-world living
conditions can consist of a few animals for milk, meat, and fabric; a plot of land
for food; water from a well or stream; and a shelter constructed of the most basic
materials. The lack of commerce (fewer transactions) due to minimal currency
availability and inherent lack of corporate employment shifts the make-or-buy decision
to the make side.

The make-or-buy decision determines our transportation (ride an animal, bike,
bus, car, plane — or walk), our clothes (make material, sew, buy at store), our
entertainment (sit and talk, sing, play an instrument, listen to others play, listen to
radio, watch TV, browse the Internet), and our health (exercise, eat healthy food, sleep regularly, take pills, have operations). Economic standing, availability of items,
availability of currency, needs vs. wants, and many more considerations play a role
in our personal decisions whether to make or buy. Every organization (individual,
family, firm, or community) decides to make or buy numerous times for every
endeavor in which it engages. The organization’s discernment of value in these
choices often determines its long-term success. A thorough understanding of the
mission, purpose, and values of the organization provides a guide to the myriad of
make-or-buy decisions.

Seeing the World through Transactions

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STORY OF RONALD COASE

Dr. Ronald H. Coase was born in England in 1910. During the academic year of
1931 to 1932, he came to the U.S. on a traveling scholarship to study the structure
of American industries. Coase was a socialist at the time and sought to understand
capitalism. He visited Ford and General Motors. Coase came up with a puzzle: how
could economists say that Lenin was wrong in thinking the Russian economy could
be run like one big factory, when some very large firms in the U.S. seemed to be
run very well?

What came out of his enquiries was not a complete theory answering the
questions he initially sought, but the introduction of a new concept into economic
analysis:
transaction costs.

Coase used transaction costs to explain why there are
firms. Coase wrote firms were smaller versions of the socialist approach of centrally
planned economies, but they existed because of people’s choices. Coase asked, why
do people make these choices? The answer, wrote Coase, is “marketing costs.”
(Economists now use the term “transaction costs.”)
Coase theorized that, if markets
were costless to use, firms would not exist.
Instead, individuals would make personal,
arm-length transactions. But because markets are costly to use, the most
efficient production process often takes place in a firm. Coase’s explanation of why
firms exist birthed a body of literature on the transaction analysis. These ideas
became the basis for his article “The Nature of the Firm,” published in 1937 and
cited by the Royal Swedish Academy of Sciences in awarding him the 1991 Alfred
Nobel Memorial Prize in Economic Sciences.

What Coase observed at Ford and General Motors were very large and vertically
integrated manufacturing firms. Less than a generation before, Henry Ford had
changed manufacturing forever by the invention of the assembly line, complete with
repetitive tasks, interchangeable parts, interchangeable workers, and a product priced
so the workers themselves could afford to buy it. Since Ford initiated this type of
large manufacturing operation, there were not many supply sources his firm could rely on to produce parts in the quantity he needed. Part of the vertical integration
resulted from necessity: no other source of large quantity supply.
Another factor supporting the monolithic, vertically integrated structure was the
limited transportation and communication infrastructure. The concentrated growth
of Detroit as an automotive industry center was in no small way attributable to the
need for suppliers to be in close proximity to the end producer. Once suppliers of
sufficient size and quality were located in the region, Ford and other growing
competitors, like General Motors, began to have choices for their component supplies.
They could either make the part themselves or buy it elsewhere. The firm
began the evolution from a monolith to a network of suppliers. The primary driver
was the cost of the part.

Purpose of Technomics

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Creates a framework for spotting technology trends that will impact your
organization.

Creates a method for developing “metrics” that combine key technology
attributes with economic measures. Understanding the timing of these
trends results in timely deployment of resources.

A LEADING INDICATOR: THE MILITARY

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If technology is the instigator of organizational change due to economic selection,
is there an instigator of technological change? Yes. Military demands have been the
driving force in the development of most technologies throughout the ages. From
gunpowder to atomic energy, early digital computers to microprocessors, telegraph
to Internet, semaphore to satellite, DaVinci machines to space shuttles, military needs
have pushed the boundaries of science to implement practical solutions. One key
reason for the military’s role as the leading source of technology innovation is that
military survival supersedes economic competition. Typically, such demands are
accompanied by a national attitude of survival at any cost.
Technology leaps are often generated in an environment where numerous possibilities
are pursued, and the end work product does not have to stand the economic
pressures of the consumer marketplace.
Generous military expenditures for nascent
technologies become the incubator in which ideas and possibilities become fieldtested
realities.

The military potential, fueled by fear of the unknown enemy rather
than the economic return, becomes the motivational seed for cultivating a host of
futuristic technologies. The journey from concept to proposal to prototype to early
adoption traverses the most treacherous territory for any new technology, whether
or not it is related to military endeavors. Many innovations do not cross this chasm
for lack of financial resources, but far fewer would ever begin the journey without the lifting of the economic constraints spurred by military considerations.

This is a techonomic observation, not a judgment on the morality of this arrangement.
Obviously, it would be preferable for the world to become so safe and peaceful,
universally inhabited by such civilized and enlightened people, that the need for
military protection could fade away. The reality is that we do have militaries and
that, when they are large and well funded, the scientists and technologists working
for them escape economic pressures, vastly increasing their ability to extend the
boundaries of science.

Xerox Park created the foundations of
the modern personal computer interface only to have its own corporation fail to
grasp the value and potential of the visual operating system. Technological descendants
of the Xerox Park operating system were popularized by Apple and made
massively profitable by Microsoft. Even when a research laboratory supports a
corporation, the risk of marketplace deployment may cause many valuable innovations
to remain in the lab due to the lack of a controlled, early-adopter market. These
are stages in the life of a new technology for which military applications provide
the gestation: need identification, conception, theoretical development, experiment,
prototype, refinement, and field trials.
Military application of technology, as a general rule, provides the bellwether of
future mass applications of commercial technology. To anticipate the technologies
that will emerge in the consumer market tomorrow, one need only study today’s
military technologies with an eye toward potential civilian applications understanding
the possibilities of mass-application cost reductions. The Web, cell phones, global
positioning systems, bar codes, lasers, biometrics, radio frequency identification tags
— the list of currently expanding technologies derived from military beginnings is
almost endless.

Although the military is not the only site of technological development,
it is the premiere entity with resources, focus, and urgency to develop
and field-test technologies on the cutting edge of science.

What remains for the
consumer market is the shifting of technology application to civilian needs, cost
reduction to meet market expectations, and improvements in operating reliability to
satisfy the demands of mass applications. These things take time, even in our fastpaced
Internet world. Therefore, if you watch military developments, you may just
be struck by an insight about what is coming to your market in the next few years.

FUNDAMENTAL ASSUMPTIONS

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A handful of fundamental assumptions support the applicability of techonomics to
anticipating organizational trends. These assumptions, simple as they appear, are
fundamental to the “natural selection” analogy that supports the relationship between
technological development and economic impact. Remove any one of these four
fundamentals from the marketplace and economic pressure for organizational evolution
is disrupted.

•
Relatively free market
— A free market is required for the economic
advantages of technological advance to be embraced. In a contrived/controlled
marketplace, meritorious practices give way to political persuasion,
regulation or subsidy.
•
Competition
— Competition in the marketplace is the force that drives
organizations to embrace best practices. Best practices fuel the rapid pace
of technology adoption, thereby advancing the economics of the enterprise.

•
Competition
— For organizations to progress, the universe of
knowledge must be expanding. The rate at which this expansion occurs
in any period of time determines technology’s degree of influence on
organizations within the framework of the economy. Hence, in times of
rapid knowledge expansion, techonomic trends become more evident and
more important.
•
Self-interest
— Individuals and organizations make decisions based on
their desire to survive and thrive. Without these desires, organisms/organizations
— be they individual, corporate or national — cease to improve,
leading to demise. While some decisions and actions are conceived out
of good will, economic viability is at the forefront of entities that stand
the test of time. Whether producing for the market or buying from the
market, organizations expend resources on the best perceived products
and services. Once self-interest for improvement is removed, by entitlement
or regulation, the fundamental motivation for progress is destroyed
— along with the vitality it brings.

TECHONOMICS: THE DEFINITION

2007-07-01T20:18:00.000-07:00

1. The study of trends in technology and their resulting economic effects on
organizations.
2. A theory of organizational evolution that results from technology advance
selected by economic success.

Combination of technology + economics:
•
technology:
Greek
tekhnologia,
– systematic treatment of an art or craft:
tekhne,
– skill or craft + -
logos,
knowledge or reason.
3
•
economics
: Middle English
yconomye,
management of a household, from
Latin
oeconomia,
from Greek
oikonomia,
– from
oikonomos,
manager of
a household:
oikos,
house +
nemein,
to allot, manage.
4
The two words,
tech
nology and ec
onomics,
have been fused to derive
techonomics:
the study of how technology shapes organizations through the economy. For
clarity in the engineering professional, techonomics should not be confused with
Technometrics,
which is the name of an industrial engineering technical publication
focusing on measurement of technology.
Techonomics combines technology and
economic measurements to objectively observe trends related to organizational
success.
Among Sir Isaac Newton’s famous statements is this one:
For every action there
is an equal and opposite reaction.
Techonomics views technology as the driving
action,
the instigator, of new opportunities, the force behind new organizing principles.
The economic
reaction
of organizations is the observable result. The reactions
in organizations are not precisely “opposite,” of course, but measurable economic
costs for technology implementation are fundamental to predicting the likelihood of
successful deployment.
Technological advance creates opportunities for new organizational
structures, while economic success determines long-term viability of
organizations.
Traditionally, economics has been guided by the study of fundamentals of supply
and demand in the free market to determine the pricing of goods and services.
5
Marketplace fundamentals of supply and demand are no longer the same in an era
where technology makes it possible for most consumer goods to be overproduced.
Even more telling, constraints on “supply” are nonexistent in the world of a “virtual”
information-based product. As Nicholas Negroponte describes in
Being Digital,
we
are well into the economic journey from atoms (things) to bits (information).
6
The
fittest organizations in today’s business environment survive and prosper because
they focus on deploying
all
resources wisely. Successful organizations capitalize on
the understanding that technological advancement precedes economic opportunity.
The lexicon used to describe commerce is filled with an ever-expanding list of
new terms: mass customization, globalization, networking, off-shoring, virtual companies,
rationalization, micro-multinational, rolling warehouse, just-in-time. It is
difficult to sort all these changes out, let alone put them all back together into a
worldview that makes sense. Techonomics provides an observation post — an
analysis process grounded in technology — for evaluating the root causes producing
these emerging terms and practices. It reveals the
why
behind the
what,
fueling major
trends in fast-paced twenty-first-century organizations.
A few common terms will be used frequently in the discussion of techonomics.
The specific techonomic context of these terms will aid your understanding of the
subject. These terms include:
Organization
is broadly applied to reference any group of people who
share a definable, common affiliation — business, geographic location,
citizenship, religious affiliation, civic association, nonprofit business, volunteer
group, etc. Organizations are as diverse as the people and the
endeavors they pursue, yet all organizations share observable characteristics.
Every organization has a purpose, some better than others. Every
organization has a beginning and, probably, an ending someday — a life
cycle. Every organization requires energy, direction, and communication
and creates some form of community structure. For organizations to thrive,
they must pursue sustainable economic models.
•
Endeavors
are the products and services that organizations produce, the
valued output. Endeavors for your business organization might be products
or services. For the nonprofit organization, the endeavors might be education,
a catalyst for public action, or spiritual conversion. Business
endeavors range from tangible products to intangible information with a
myriad of possibilities. The local community might broadly classify the
quality of life as its main endeavor. The societal value of endeavors relative
to their cost to produce is a key determinant of the prosperity of the
organization. When multiple organizations perform the same endeavor,
the most efficient/effective organization typically thrives, while others
diminish. In a free-market economy “natural selection” causes vibrant
organizations to adopt best practices for the performance of their endeavors.
•
Transactions
are the interchange between organizations or individuals in
the marketplace. Participants in transactions are either the buyer (customer)
or seller (producer). Transactions are the fundamental building
blocks of commerce — no transactions, no commerce. The observation
of shifting organizational transaction patterns gives direct insight into the
impact of technology on the economy.
•
Metrics
are the combination of measurements into a value that can be
useful as an unbiased, numerical indicator of a trend when computed over
spans of time. Techonomic metrics (techonometrics) combine technology
measurements with economic measurements to track the market potential
of innovation. A complete discussion on the formulation of techonomic
metrics is found in the next chapter.

FROM BIOLOGY TO BUSINESS

2007-07-01T20:15:00.000-07:00

My grandfather grew up across the classroom from the folks he would compete with
for life.
My father grew up across the country from the folks he would compete with for life.
I grew up across the world from the people I would compete with for life — only they
knew it and I did not! In 1859, Charles Darwin published his book

The voyage included a pristine venue, the Galapagos Islands.
His framework for organic evolution was based on what he observed about
mutation, variation, and adaptation to environmental conditions. He developed the
concept of natural selection, commonly known (after Herbert Spencer coined the
phrase) as “survival of the fittest.” The idea was, organisms that developed various
features differing from the rest of the population tended to prosper and survive and
reproduce if those different features — even slightly different — gave them some
sort of advantage in the environment. For example, a coloration that blended in a
bit better with the surroundings could better disguise an organism from predators,
giving the organism a better chance of survival. These traits would then be passed
down to offspring, and in some of those offspring, advantageous traits might become
even more pronounced.
This theory has been widely taught as a structural explanation for the diversity
of living organisms. It has also touched off countless ideas and debates, of all kinds.
In the modern age, scientists and theologians attack, champion, or modify aspects
of Darwin’s theory to explain the origin and development of life, but the value of
an organized theoretical framework remains. Without passing judgment on its factual
validity,
we can use Darwin’s Theory of Organic Evolution as a way to view the
interplay between key components in a complex, changing system and, by analogy,
understand organizational evolution through techonomic progress.
This parallel
extends the organic to the organizational, the biological to the industrial, Darwinism
to techonomics.

Organic evolution, as described by Darwin, is a process by which organisms
change by mutation during procreation and live or die by natural selection, creating
a stronger successive generation. This theory provides a framework in which to
study, classify, and analyze the diversity of biological life. The techonomic theory
of organizational evolution describes the technological mutation, economic adaptation,
and growth of organizations. In many ways, the success or failure of human
organizations parallel the success or failure of individual living organisms. The
similarities between the processes that drive these two theories will be frequently
used as a framework for understanding the new relative to the familiar. Both
approaches are theories, but they provide a framework for observing patterns in the
changing worlds of life and organizations.

The theory of techonomics is based on personal observations spanning two
decades of business development in a unique period: the dawning of the Internet.
Techonomics views the organization as the evolving “organism.” Unceasingly,
throughout history, organizations are born, grow, mature, and ultimately die. Technology
is the driving force that causes change, or “mutations,” in how organizations
function. The competitive economy is the “environment” that imposes “natural
selection” on organizations based in no small part on their effective adoption of
technology. Successful organizations grow to “procreate” again. Unsuccessful organizations
ultimately become economically bankrupt and “die.”
During the emergent In the U.S. in the year 2000, the number of businesses increased by over
500,000.

While some initiated new operations, others declared bankruptcy or ceased
operations. Figure 1.2 shows the parallel between the life cycle of an organization
and the life cycle of an individual person. Both entities, organization and individual,
begin very small at a definable instant. The organization starts as an individual’s
conceptual idea, the person starts with physical conception. At this stage, both are
fragile, not well defined, and must be nurtured to grow. If gestation continues, birth
follows. Now the entity becomes recognized by the world: the organization files a
legal charter and is named, the child is born and given a name and birth record.
In the early years of life, for both the organization and the person, a tremendous
learning curve and physical development must take place. Size and financial requirements
are small, but the need for guidance, protection, and training are large. The
experimentation and exploration continue for a season of life until both the organization
and the person find direction and focus. At this time, financial requirements
may increase, as resources are needed to pursue opportunities. Business organizations
need growth capital for manufacturing, inventory, sales force, etc.; individuals
need support for things like education, shelter, and transportation as they try to
establish their independence. As maturity comes, both organizations and individuals
reach a plateau of sustenance, knowing their roles and performing those roles in
exchange for the resources needed to thrive.

In the course of time, both organizations and individuals pass away, giving rise
to the next generation. This next generation may look nothing like the previous one
in composition and purpose.

The life-cycle time frame for any entity, organization,
or individual varies greatly, but the idea of generational cycles for a typical lifespan
is relevant to the concept of organizational evolution.

Certainly, throughout history
organizations have been born, grown, flourished, and died giving way to a next
generation more prepared for the demands of the marketplace. Understanding and
describing the factors contributing to the evolution of human organizations through
the ages provides the motivation for the “Theory of Organizational Evolution.”
While the norm is a continual, incremental advance of technology — and this
parallels Darwin’s notions about “gradualism” in evolution — there sometimes
occurs a discontinuous leap of innovation that powerfully impacts the world in an
irreversible way. For example, the discovery of atomic energy, the introduction of
mass production methods, the development of the microprocessor, and the creation
of the Internet represented discontinuous innovations that had significant societal
impacts beyond the realm of technology.

Big, seemingly discontinuous advances like these parallel something evolutionary
theorists call “punctuated equilibrium,” a variation/challenge to Darwin’s theory
that tries to account for seemingly big leaps of development in the fossil record. It
is a concept used to describe changes for which scientists cannot find “gradual”
explanations. But techonomics is an observable theory. Even big, discontinuous
technological innovations do not happen in isolation from the economic pressures
all organizations must endure. They occur within the bounds of science, technology,
economics, and society. The competitive environment of the marketplace ultimately
determines successful innovations that live to see another day.

Survival of the fittest in the domain of the organization is determined by the
economic survival of the organization. Organizations that embrace technology as a
means to continuously improve efficiency maintain and extend their competitive
position. An organization that becomes insular to technological advancement eventually
ceases to be competitive and ultimately fails economically. Therein lies the
generational cycle of organizational birth, growth, and death that mirrors the same
pattern in the living organism.

INTRODUCTION to Techonomics

2007-07-01T20:14:00.000-07:00

tech*o*nom*ics (tˇek
′
eˇ -nˇom
′
iˇks) n.- The study of trends in technology and their
resulting economic effects on organizations.

It only takes one thing to succeed —
Good judgment.
It only takes one thing to get good judgment —
Experience.
It only takes one thing to get experience —
Bad judgment!
The adage above is comical because it rings true. You can do everything yourself,
learn all your own lessons, make all your own mistakes, or you can learn from the
experience of others and benefit from their mistakes. Besides learning from other’s
experiences, one of the best ways to avoid mistakes is to understand the impact of
trends.

Trends are to a business as trade winds to a ship: it makes a world of
difference whether they are with you or against you.

The experienced seek to
understand and harness them. It matters not whether your “business” is investing,
guiding a family, advising a student, leading a nonprofit, or deploying limited
resources for a company: understanding the trends shaping the present and future
of the world around you will benefit your decision making. Techonomics, the study
of trends in technology and their resulting economic effects on organizations, is
offered as a tool for understanding the rapidly changing world and providing advantageous
insight for leaders. It will give you a thought process, a way to help you
spot and analyze technology trends to aid decisions that are with, not against, the
winds of change.

Much of what we regard as “intelligence” can accurately be described as pattern
recognition: the shape of a diseased cell, the color of the sky indicating approaching
weather, the cycles of the business market. Specific, measurable advances in technology
are patterns for economic and organizational change. By following major
changes in technology as a leading indicator, you can anticipate many economic

More Terminology Related Techonomics

2007-07-01T20:13:00.000-07:00

Predictable Antiquation.
A shortened useful life of many electronics products
is the result of continuous improvements in performance enhancement
resulting from Moore’s Law. This advance causes a computer bought
today to be obsolete in 2 to 5 years, even though it remains fully functional.
It is no longer compatible with the software and peripherals emerging in
the industry and the user may demand faster system performance.

Product Life Cycle.
The life cycle of a product refers to the period of time in
the marketplace that a particular design will remain a competitive offering.
Due to the impact of Moore’s Law, the product life cycle for consumer
electronics is typically less than 2 years.

Renewable Energy.
An energy source that can be replenished regularly is referred
to as renewable. This term is used to refer to solar, wind, hydro, wave,
bio-fuels, and others that regenerate cyclically through the day or season.
Nuclear breeder reactions also create more fuel than they consume, but
are seldom considered in the definition of renewable energy.

Rolling Warehouse.
Just-in-time delivery often uses trucks for delivering supplies
to product integrators. The work in progress is the work inside the
truck, hence the name rolling warehouse.

Self-Interest.
It is the nature of all organisms and organizations to preserve their
own lives. Self-interest refers to the motivation to make choices conducive
to survival.

Switching Costs.
In transaction analysis, the switching cost is the cost or risk
associated with replacing a supplier should a problem arise. If alternative
suppliers are plentiful and outages are not critical, switching costs are
low. When there are no known alternatives, or the cost of downtime is
great, switching costs are very high.

Techonomics.
Techonomics is a theory of organizational evolution resulting from
the study of technology trends and their economic effects on organizations.
Techonomic Metric.

A measurement based on technology performance and
economic cost. It is used to anticipate trends in organizations.

Techonomic Sweet Spot.
The combination of performance advantages and cost
savings yields
a target where new technology offers significant market
positioning opportunities.

Transaction.
An exchange between parties of endeavor for monetary compensation
is the essence of transactions.

Transaction Costs.
The expenses associated with transactions that determine the
total economic consideration for an exchange. In addition to the price
itself, transaction costs include the cost of transportation, maintenance,
replacement, quality assurance, vendor reliability, etc.

Virtual Age.
The Virtual Age is marked by an ever-expanding digital infrastructure
capable of fulfilling an increasing array of life needs. We have passed
through an Agricultural Age and an Industrial Age, and more recently
through the Atomic Age, Space Age, Information Age, and Biotechnology
Age. The Virtual Age is based upon the three current trends of techonomics
that will propel organizational change throughout the first half of this
century.

Terminology Related Techonomics

2007-07-01T19:53:00.000-07:00

Acceptable Risk.

Every activity carries some degree of risk for economic or
physical injury. Acceptable risk defines the severity and probability of
injury an organization is willing to tolerate for a given activity in order
to receive the benefits offered by that activity. No risk, no reward. Too
much risk, too much liability.

Automated Bureaucracy.

This is a system in which policies and procedures
have been implemented with intelligent machines rather than human labor.
Best Practices.

The most cost- or labor-effective approaches to endeavors developed
by an industry. Smart competitors learn from others and often
embrace best practices to improve their own operations.

Burdened Labor Rate.

The total cost of human labor including wage rate, all
benefits costs (health insurance, retirement plan, etc.), and employment
taxes (Social Security, unemployment tax, workman’s compensation, etc.).
Burdened labor rates can exceed wages by 50 to 100% in the hidden
economy of mandated benefits.

Business Process Outsourcing (BPO).

The systematic development of a provider
network to perform the basic activities associated with fundamental business
operations: accounting, distribution, record keeping, etc. BPO is a
subset of outsourcing, referring to the information-based activities fundamental
to business operations.

Capital.

Money, particularly as used to fund the productive capacity of organizations.

Capital Formation.

The process of acquiring capital for an organization. Capital
formation is easier in markets with a track record of return on investment
and consistent legal policies.

Chained Dollar.
A measure of inflation based on annual purchase of an equivalent
“basket” of household goods. Instituted in 1996 to replace the inflationadjusted
dollar, the chained dollar benefits from a built-in electronics cost
reduction resulting from the effects of Moore’s Law.

Coase-Downes-Mui Law.
The Law of Increasing Productivity results from considering
Coase’s transaction analysis along with the effect of “perfect
information” noted by Downes and Mui.

Comparative Techonomic Metric.
A measurement combining technical performance
and cost to compare alternative means of performing the same
endeavor. Comparison might be between different manufacturing plants,
different materials, or different processes all producing the same product.
The goal is to determine the best approach (find the “best practice”).

Competition.
A force resulting from the free market in which multiple organizations
perform the same, or very similar, endeavors for commerce. Competition
is the impetus behind techonomic evolution: it causes best practices
to be developed and embraced, leading to greater productivity.

Consumer Price Index.
A measurement of inflation, annually adjusted, used as
a benchmark for the condition of the economic system.

Continuous Improvement.
An operational philosophy seeking to promote
progress and productivity by constantly advancing operating techniques
based on innovation and incorporation of marketplace best practices.

Cost-of-Living Adjustment.
A financial adjustment in entitlement and employment
agreements that increases these payments every year based upon
changes in the Consumer Price Index or other accepted measures of
inflation.

Customer Labor Component.
In an effort to minimize labor costs, producers
have systematically automated manufacture and shifted some labor components
to the customer (“some assembly required”). Franchises are
exceptional at this, with customers responsible for checking out, serving
their own food, and bussing their own tables.

Digital Omniscience.
A hypothetical condition (but one drawing nearer to reality
all the time) in which communications networks become so pervasive,
and computationally capable, that networked computers know everything
about everyone.

Earnings.
Profits an organization receives for performing an endeavor (basically,
revenues – expenses).

Endeavor.
The output of the organization: products, services, or other activities
that create exchangeable value. Transactions spring from the exchange of
endeavors between organizations.

Endeavor Cash Flow.
The measurement of capital and its time value use in the
process of performing an endeavor.

Franchise Effect.
Franchising is a method of organizational growth that consists
of replication of successful “units.” Local operational models are perfected
and multiplied regionally, nationally, and internationally to grow an
organization, while operations in each new location are kept small and
efficient.

Free Cash Flow.
At the completion of an endeavor, this value is the revenue
minus the cost of production including any capital expenses (facilities and
equipment) necessary for production. Free cash flow does not include
consideration for the time value of money as endeavor cash flow does.

Free Market.
Free market commerce is characterized by multiple suppliers,
domestic or international, with equal opportunity to transact business.

Frictionless Economy.
“Frictionless” economy refers to an ideal condition where
perfect information about all supply source possibilities is readily available.
A frictionless economy enjoys abundant information and no procurement
boundaries (tariffs, prohibitions, etc.).

Globalization.
Globalization refers to the increasing connectedness of the world’s
markets, businesses, and production networks. This increase in the distributed
nature of production results directly from the three primary laws
of techonomics: increasing computational capability, increasing communication
connectivity, and increasing productivity of organizations.

Gross Domestic Product (GDP).
This value is the sum of the economic value
of all goods and services produced annually by a nation.

Hand-Held Convergence.
The merging of all communications and media devices
into a single, portable, wireless unit including cell phone, music, radio,
television, Web access, photography, videography, and e-mail.

Hedonic Correction.
An adjustment to the GDP based on the utility of goods
produced rather than the actual money generated from the exchange of
those goods. Due to Moore’s Law, this correction accounts for an everincreasing
contribution to the GNP by technology advance that is not
substantiated by cash flow from purchases.

Hidden Costs.
Hidden costs are all the expenditures for a transaction in addition
to the actual price. These include costs of switching, finding, rejection,
rework, disruption, etc.

Historic Techonomic Metric.
A measurement comparing the current technology
output per unit measure relative to the same production at different points
in time. Because of the limited timeframe for currency relevance, these
measurements typically must use an economic component other than
dollars. Production measurements relative to labor hours, land use,
material consumption, etc. form the basis for historical comparison of
techonomic progress.

Inflation-Adjusted Dollar.
A traditional measure of inflation based on yearly
purchase of basic commodities without correction for technology advance.
Interdependency.

This term is the opposite of self-sufficiency. This is the concept
of community wherein all members produce and exchange endeavors with
others in order to survive and prosper.

Just-in-Time Delivery.
JIT is a manufacturing process where supplies are provided
only when needed, eliminating large inventories, storage facilities,
or extensive amounts of work in progress.

Law of Increasing Productivity.
This term is
synonymous with the Coase-
Downes-Mui Law and the Third Law of Techonomics. This Law predicts
continuing improvement in productivity due to transaction analysis powered
by perfect information.

Law of the Mean.
All things tend toward an average unless external forces
maintain a difference.

Law of the Ubiquitous Global Network.
Synonymous with Metcalf’s Law and
the Second Law of Techonomics, this Law predicts the World Wide Web
will continue to grow until every person, and most objects, become addressable
on a wireless, ever-present network.
Law of Ubiquitous Computing.

Synonymous with Moore’s Law and the First
Law of Techonomics, this law predicts incorporation of intelligent microcomputers
into an increasing array of products as microprocessor cost
diminishes exponentially. Virtually every product will be “smart” and
getting smarter all the time. Human intellect will add less value to the
bureaucratic or “standardized” workplace, and more to pure research,
technological innovation, and creativity of all sorts, as machine intelligence
automates more labor.

Lean Organization.
A business that has trimmed most of its organizational
overhead by outsourcing support functions to the most effective supplier.

Macro-Multinational.
This term refers to a very large multinational firm that
exhibits the characteristics of a nation because of the extent of its operation,
revenues, and global influence.

Make-or-Buy Decision.
In transaction analysis, a layman’s term referring to the
decision about the most effective way to carry out an endeavor. Basically:
Shall I do task X myself or hire someone to do it for me, so I can
concentrate my efforts and resources elsewhere?

Mass Customization.
A manufacturing process wherein the customer chooses
the configuration of a sophisticated final product, and the manufacturer
makes it to order. Twenty-first-century business networks and electronic
data interchange make this mode of operation possible on a scale never
before conceivable.

Media Convergence.
The merging of all entertainment information into a single
delivery platform: television, music, video games, Internet, etc.

Metcalf’s Law.
Named for the observation of Bob Metcalf, founder of 3Com,
this law is the mathematical observation that the connections on a network
grow exponentially relative to the number of users. (Connections = 0.5
×
(X
2
– X), where X is the number of nodes.)
Metric.
A measurement developed from available data to monitor a key performance
trend.

Micro-Multinational.
This term refers to a start-up company with a core leadership
team, typically in the U.S., leveraging international labor for development
and manufacture in order to minimize the capital needed for
starting and expanding operations.

Moore’s Law.
Named for Gordon Moore after an observation he made in a 1965
technical paper. He stated that electronic transistors would be packaged
twice as densely every 18 months, hence reducing their costs or increasing
their performance proportionately.

Organic Evolution.
A theory stating that living organisms sprang from a common
ancestor or a few ancestors and, over the eons, morphed into the diverse
life forms observable today. This occurred through a continuing process
of mutation and natural selection (the environment favoring survival and
reproduction in organisms possessing even slight mutations/differences
that helped them in some way: slightly better eyesight, speed, coloration,

etc.). As used here, the term is synonymous with Darwin’s Theory of
Organic Evolution.

Organizational Evolution.

A theory about the progress of organizations that
states they advance in a process similar to the one proposed by Darwin
for organisms. Technology causes mutation; the economy serves as the
environment; competition provides the filter for natural selection; adaptive
organizations grow and prosper; dysfunctional organizations die. Over
time, organizations become more efficient and productive as they evolve
to improved operational structures. In this book, the term is used synonymously
with the Techonomic Theory of Organizational Evolution.

Organizational Span of Control.

This is based on the number of individuals
reporting directly to the next level of organizational management. The
span of control is low (< 7) in a vertically integrated and traditionally
managed organization. The span of control is large in a “flat” organizational
structure where personal control is augmented by electronic communication
and performance management.

Outsourcing.
Transferring endeavors from internal performance to an external
supplier. With “perfect” information, the impediments to procuring goods
from external sources are minimized or eliminated, leading organizations
to more purchasing (external) rather than internal production.

Natural Selection.
The process wherein organisms compete for life resources in
order to survive and are favored in their environments, or not, due to their
characteristics (see Theory of Organic Evolution). Natural selection, also
known as the survival of the fittest, plays a pivotal role by winnowing out
organisms that are unable to successfully compete, leaving the stronger
organisms to procreate and produce the next generation.

Planned Obsolescence.
A design technique used to estimate the useful life of a
product and create the design specifications, and hence the end product,
around the desired useful life of the product.

Perfect Information.
Absolutely perfect information for making decisions would
be free, complete, accurate, timely, and actionable data. This is an ideal,
but the closer the approach to this information, the higher the confidence
in decisions. Perfect information favors outsourcing in the make-or-buy
decision.

Performance/Cost Ratio.
Techonomic metrics combine elements of technology
measure with economic considerations. Performance/cost ratios can be
used for comparing stock values, manufacturing processes, resource use,
etc.

Positive Cash Flow.
The time difference between receipt of customer’s money
and requirement to pay suppliers can provide money to an organization.
If an organization’s endeavor is sale of computers, for example, that
organization may receive a customer’s money months before payment is
due to vendors who supplied the computer’s components. Online ordering,
mass customization, and favorable supplier terms lead to enhancing positive
cash flow.