Tuesday, December 16, 2008

1.- Introduction

This Blog is focussed on how Innovation works in the Information Technology (IT) space. As the first entry in this Blog, it is natural to simply try to survey the field. This way we'll be able to map the field's structure, the issues and goals faced by the practitioners of this discipline.

First, we have to define what we understand by Information Technology and Innovation. By Information Technology (IT) we mean all technologies, products and processes that imply the transport and/or processing of data and/or information in digital form. Simply said, doing anything with bits. And, by Innovation we mean the process of producing new value to the firm or to a person, usually measured in financial terms, but not always. For example, new value for a Defence or Security organization is usually an increased ability to reach its goals, and thus provide that public good called security. But, in general, value is noticed each time a customer puts his or her hands in the pocket or purse, gets cash out and puts it on the table.

We are not talking here only of innovation as "an historic and irreversible change in the way of doing things" as J.A. Schumpeter would put it, since we view this as a radical or revolutionary innovation. We'll also discuss the more pedestrian and day to day business of incremental innovation by producing new products and services in the IT space, which is where most of the value is generated normally.

Clearly IT is just the kind of technology that can be described as the result of some radical innovations, since not only nearly all of our daily activities have been modified by IT but some new activities have become part of our day to day routine. Spending hours of the night at home accessing large numbers of computers in different continents just as entertainment while surfing the Net or talking by mobile phone with a Bluetooth headset while jogging are just some of the unimaginable activities we now routinely do. Even more, those are activities we cannot live without. Even people who were already out of college when this started state that they cannot live today without the Net or a Cell phone, even thought these are clearly digital immigrants.

The industrial revolution was based on harnessing the power of steam and on the mastery of iron and its derivatives. Both could be touched and were quite concrete. But the radical innovations that made the digital revolution possible have been squeezed out of things that nobody has ever seen, namely the electron, the photon and the bit. In the very essence of this digital revolution, lies the electronic technology which is based on a science, quantum mechanics, that no sane person would really understand. In the very depths of these electronics we find the delicate construct of the mind which is called software, whose beautiful and fragile structures can only be imagined, but not seen, with the help of Boolean logic and such kind of mathematical tools. And all of these electronic and digital constructs are the foundation of the IT space and the source of immense value generation.

The mastery of the electron and photon required a deep understanding of science and was only achieved in the laboratories of countries which had already mastered the iron and steam of the industrial revolution. No countries without a large scientific and technological base was ever able to design new devices based on the electron and photon. A good history of how this was achieved can be found in the book Competing for the Future: How Digital Innovations are Changing the World written by Henry Kressel.

It has been said that the expression "IT Innovation" is redundant since nearly every new development in IT is an innovation per se. But, on one side, this is short sighted since not every research and development (R&D) project produces value, and, on the other side, the study of how and where, and to whom, value is produced is of the utmost importance to the firm and practitioners of the discipline.

As a consultant advising a company on how to increase the value produced by the IT function, the question to answer usually is; Where and How, in a Process, Value is Produced by Which Area and to Whom? Giving the pervasiveness of IT in the depths of most of the processes of any organization these days, answering that question might not be easy. Especially when the answer does vary from user to user, from process to process, from component to component of the process, from development methodology to development methodology, from hardware component to hardware component, etc.

For example, it is clear that the IT space was built incrementally on top of the development of the vacuum tubes, the transistor, the p-n junction, the MOSFET, CMOS, IC, VLSI, the diode, CCD, OLED and so on. Designing and manufacturing all of these components clearly creates huge value, but only major industrialized nations are able to compete in this space. The next segment is in countries which are in development and have a good enough technological base to use these components to design and build devices. The Asian Dragons are the perfect example of this kind of countries. Last are the countries that only have the technological base to put to good use these devices. Value is generated in each of these segments, but in different ways.

In this Blog I'll try to propose a segmentation of where value is produced in the IT Innovation space, but more questions will be asked than answered in the process.

2.- The Physical View

2.1 An Introduction to the Physical View or A Brief Taxonomy of the IT Devices

One way to look at the IT space is what I would call the Physical View, which includes all of the physical devices that are collectively used to perform some kind of gathering, transport, manipulation, computation, storage and/or display of digital data. These devices can be divided in three different main groups; the Data Centre, the Network and the User's Devices, each with very different trends. The detailed explanation of the causes of this polarization of the IT space are outside the scope of this article, but they can be briefly described as caused by the economics of the new technologies.

Basically, the amount of bandwidth that has been squeezed out of sand (fiber optics), cooper (xDSL) and thin air (wireless) is quite incredible. Even more, the cost of moving a bunch of bits from a place to another has dropped by various orders of magnitude. And it is expected to just keep on failing. Each time a cost drops a few orders of magnitude we have a change in structure in an industry, usually called a revolution. Cheap, fast and low latency transport of digital data and/or information implies a delocalization of the IT infrastructure. For example, nobody cares where Amazon.com's Data Centre really is.

In other words, it does not matter any more where my server is as the quality of the service I get from it is the same, independently of the Data Centre I use to host it. But, there are some important economies of scale in running a Data Centre. And running a Data Centre the double of size does not cost the double, but quite less than that, because of important economies of scale. The trend is then for larger and larger Data Centres.

On the other side, customers and users are making use of devices that are smaller, cheaper, faster, ubiquitous and always connected to the Net. Moore's law and Metcalfe's law are having a huge impact. The Economist run a special edition on April 28th, 2007, with 14 pages dedicated to the impact that all of these devices connected to the Net were having.

2.2.- The Customers and their Devices

Lets look at the customers and their devices. These devices are an incredible mixture that ranges from the familiar devices which all have now a "Digital Heartbit" to brand new devices like our MP3 players. We have them in our houses and offices, we wear them and sometimes, we even have them in our bodies (i.e. Pacemakers). Some people, like Scott McNealy, talk about things that have a "Digital DNA", including interesting little buggers like the Tyndall Motes. Even more, there are a new kind of artefacts that could be using a "Digital RNA" since they do not have even a "Digital Heartbit". These are the bewildering proliferation of RFID tags embedded in more and more products, most of the time dormant, unless queried when they answer with an EPC number.

The form factor and functions of the customer devices is just incredible and, just to name a few, we have; cars, watches, iPods, webcams, ovens, beepers, game consoles, fridges, laptops, PCs, sensors, cell phones, Palms, smart phones, digital cameras, Wi-Fi Detector Shirt, washing machines, etc. I would suggest that an interesting way to categorize these devices is to plot them in a four dimension space, where the axis are: Interfaces to Users, Interfaces to the Net, Interfaces to the World (i.e. Sensors of the Physical World) and "Smartness". "Smartness" being defined as the multiplication of the MIPS number with the Memory size (in KB) divided by the weight (in Grams). For a same function, the "Smartness" of the devices will grow quickly with time.

Now, this has deep implications for the cost structure of manufactured goods as Alan Cooper, the father of Visual Basic, wrote so eloquently in his book The Inmates Are Running the Asylum; "The most vital and expensive products are made largely or completely of software. They consume no raw materials. They have no manufacturing cost. They have no transportation cost. The is no welding, hammering, or painting. This is the real difference between the industrial-age economy and the information-age economy; In the information age, there is little or no variable cost, whereas in the late industrial age, variable cost was the dominant factor. Indeed, the absence of variable cost is what makes this new economy."

The implications are quite clear; increasing the "Smartness" of your device requires a large initial development (i.e. fixed) cost and nearly no variable cost. So, either the fixed cost is spread over a large number of production units or, even better, the development cost of the "Smartness" is spread over a family of devices providing thus the production units required volume. Now, this means that companies able to invest heavily in "Smartness" during the development phase of the device will tend to dominate the market creating barriers of entry made of capital.

A couple of years ago the rage was to have a TREO 650 in your hands. Last year, you needed to send your e-mail using a Blackberry. Today, if you are in business, you have to have an iPhone. And so on. This is a market of devices, of buying decisions made by individuals with their own budgets. It is a market where fashion and style are important, but not at the cost of functionality, usability and price. Can we spell Design? Clearly yes, as design is at the centre of innovation in the artefact space. Then to add value in this space design is key. Design is clearly the core competency of Nokia, for example. These devices need to be carefully designed to meet rules of simplicity of use (IDEO had the right idea), technical factibility, cultural acceptance, functionality and pricing.

Now, lets remember that products live in the intersection of three spaces; Technology (which dictates feasibility), Needs (which dictates function) and Culture (which dictates what can done and what is taboo). Each of these spaces is a rich source of innovations, and while we are used that technology does provide most of the innovation in the artefacts we design and built, lets remember the other two components. The Institute of Design at Stanford created the next diagram to show the Big Picture of design innovation, which we find very useful;

To understand customers' needs we have the usual set of marketing tools, but more and more ethnographic and anthropological tools are being used. Also, new design methodologies are used, especially to be able to sketch user's experiences, so the experience can be designed. In the end, it is only the experience of the world that matters to us, and it is now the object of design.

The cultures are changing fast, on one side with the help of globalization some trends are globalized but, most interestingly, there seems to be a global trend for a globalization of your subculture. Maybe one of the advantages of globalization is that you can choose your own subculture, without regards to your parents and siblings choices. I'll expect to see soon digital devices, at least wearable computers, designed specifically to such global subcultures as Visual Lolita, Dark, Gothic, or, my personal favourite, Geek. Believe it or not, Think Geek is a thriving business.

Last but not least, technology today is talking to us about ambient computing, wearable computing, sensornet, ubiquitous computing, pervasive computing, invisible computing, everyware, etc. In essence, technology is pushing the limits of the Moore's and Metcalfe's Laws, and leaving us wondering what to do with the results. Of course, there are other interesting developments such as digital paper and WiMAX but the core of the innovation power in IT today comes from these two laws and from can be built on top of them.

It is important to remember that most of these customers' devices offer Services, some of them built inside the device but more and more the services are provided through the Network, whichever wireless network the customer is using at that particular moment, and these devices act as portals of access to these networks. iPods are a good example, and we'll come back to this point latter. There seem to be no end to the need we have to be in constant communication to our entourage, to the point where exhibitionism is rampant (Web sites, Blogs, Twitter, etc.) and privacy a concept that was popular for only a couple of centuries in our history.


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