JOHN M. JORDAN is a clinical professor in the Department of Supply Chain and Information Systems at the Smeal College of Business, Penn State University, where he teaches IT strategy to undergraduates, MBAs, and executives. His research focuses on emerging technologies and their impact on business strategy, design, and practice.

Information, Technology, and Innovation

Resources for Growth in a Connected WorldBy John M. Jordan

John Wiley & Sons

Copyright © 2012 John Wiley & Sons, Ltd
All right reserved.
ISBN: 978-1-1181-5578-3

Chapter One

Introduction

If you watch exponential change for long enough, the effects grow beyond comprehension. In the late 1990s the technology analyst George Gilder was fond of telling the story of “the second half of the chessboard.” Here is one version:

The emperor of China was so excited about the invention of chess that he offered the inventor anything he wanted in the kingdom. The inventor thought for a moment and said, “One grain of rice, Your Majesty.” “One grain of rice?” the puzzled emperor asked. “Yes, one grain of rice on the first square, two grains of rice on the second square, four grains of rice on the third square, and so on through the 64 squares on the chessboard.” The emperor readily granted that seemingly modest request. Of course, there are two possible outcomes to this story. One is that the emperor goes bankrupt because 2 to the 64th power grains of rice equals 18 million trillion grains of rice, which would cover the entire surface of the earth with rice fields two times over.

The story highlights one of the critical facts of contemporary life: Improvements in digital technologies are possible at scales never experienced in previous domains. As a 2005 advertisement from Intel pointed out, if air travel since 1978 had improved at the pace of Moore’s law of microprocessor price/performance (one of Gilder’s doubling technologies), a flight from New York to Paris would cost about a penny and take less than one second. Cognitively, physically, and collectively, humanity has no background in mastering change at this scale. Yet it has become the expectation; the list later in this chapter should be persuasive.

Given the changes of the past 40 years—the personal computer, the Internet, Global Positioning Systems (GPS), cell phones, and smartphones—it’s not hyperbole to refer to a technological revolution. This book explores the consequences of this revolution, particularly but not exclusively for business. The overriding argument is straightforward:

* Computing and communications technologies change how people view and understand the world, and how they relate to each other.

* Not only the Internet but also such technologies as search, GPS, MP3 file compression, and general-purpose computing create substantial value for their users, often at low or zero cost. Online price comparison engines are an obvious example.

* Even though they create enormous value for their users, however, those technologies do not create large numbers of jobs in western economies. At a time when manufacturing is receding in importance, information industries are not yet filling the gap in employment as economic theory would predict.

* Reconciling these three traits will require major innovations going forward. New kinds of warfare and crime will require changes to law and behavior, the entire notion of privacy is in need of reinvention, and getting computers to generate millions of jobs may be the most pressing task of all. The tool kit of current technologies is an extremely rich resource.

Cognition

Let’s take a step back. Every past technological innovation over the past 300-plus years has augmented humanity’s domination over the physical world. Steam, electricity, internal combustion engines, and jet propulsion provided power. Industrial chemistry provided new fertilizers, dyes, and medicines. Steel, plastics, and other materials could be formed into skyscrapers, household and industrial items, and clothing. Mass production, line and staff organization, the limited liability corporation, and self-service were among many managerial innovations that enhanced companies’ ability to organize resources and bring offerings to market.

The current revolution is different. Computing and communications augment not muscles but our brain and our sociability: Rather than expanding control over the physical world, the Internet and the smartphone can combine to make people more informed and cognitively enhanced, if not wiser. Text messaging, Twitter, LinkedIn, and Facebook allow us to maintain both “strong” and “weak” social ties—each of which matters, albeit in different ways—in new ways and at new scales. Like every technology, the tools are value neutral and also have a dark side; they can be used to exercise forms of control such as bullying, stalking, surveillance, and behavioral tracking. After about 30 years—the IBM Personal Computer (PC) launched in 1981—this revolution is still too new to reflect on very well, and is of a different sort from its predecessors, making comparisons only minimally useful.

For a brief moment let us consider the “information” piece of “information technology” (IT), the trigger to that cognitive enhancement. Claude Shannon, the little-known patron saint of the information age (see Figure 1.1), conceived of information mathematically; his fundamental insights gave rise to developments ranging from digital circuit design to the blackjack method popularized in the movie 21. Shannon made key discoveries, of obvious importance to cryptography but also to telephone engineering, concerning the mathematical relationships between signals and noise. He also disconnected information as it would be understood in the computer age from human uses of it: Meaning was “irrelevant to the engineering problem.” This tension between information as engineers see it and information that people generate and absorb is one of the defining dynamics of the era. It is expressed in the Facebook privacy debate, Google’s treatment of copyrighted texts, and even hedge funds that mine Twitter data and invest accordingly. Equally important, however, these technologies allow groups to form that can collectively create meaning; the editorial backstory behind every Wikipedia entry, collected with as much rigor as the entry itself, stands as an unprecedented history of meaning-making.

The information revolution has several important side effects. First, it stresses a nation’s education system: Unlike twentieth-century factories, many information-driven jobs require higher skills than many members of the workforce can demonstrate. Finland’s leadership positions in education and high technology are related. Second, the benefits of information flow disproportionately to people who are in a position to understand information. As the economist Tyler Cowen points out, “a lot of the Internet’s biggest benefits are distributed in proportion to our cognitive abilities to exploit them.” This observation is true at the individual and collective level. Hence India, with a strong technical university system, has been able to capitalize on the past 20 years in ways that its neighbor Pakistan has not.

Innovation

Much more tangibly, this revolution is different in another regard: It has yet to generate very many jobs, particularly in first-world markets. In a way, it may be becoming clear that there is no free lunch. The Internet has created substantial value for consumers: free music, both illegal and now legal. Free news and other information such as weather. Free search engines. Price transparency. Self-service travel reservations and check-in, stock trades, and driver’s license renewals. But the massive consumer surplus created by the Internet comes at some cost: of jobs, shareholder dividends, and tax revenues formerly paid by winners in less efficient markets.

In contrast to a broad economic ecosystem created by the automobile industry—repair shops, drive-in and drive-through restaurants, road-builders, parking lots, dealerships, parts suppliers, and final assembly plants—the headcount at the core of the information industry is strikingly small and doesn’t extend out very far. Apple, the most valuable company by market capitalization in the world in 2011, employs roughly 50,000 people, more than half of whom work in the retail operation. Compare Apple’s 25,000 nonretail workers to the industrial era, when headcounts at IBM, General Motors, and General Electric all topped 400,000 at one time or another. In addition, the jobs that are created tend to be in a very narrow window of technical and managerial skill. Contrast the hiring at Microsoft or Facebook to the automobile industry, which in addition to the best and the brightest could also give jobs to semiskilled laborers, tollbooth collectors, used-car salesmen, and low-level managers. That reality of small workforces (along with outsourcing deals and offshore contract manufacturing), high skill requirements, and the frequent need for extensive education may become another legacy of the information age.

In the past 50 years, computers have become ubiquitous in American businesses and in many global ones. IT has contributed to increases in efficiency and productivity through a wide variety of mechanisms, whether self-service Web sites, automated teller machines, or gas pumps; improved decision making supported by data analysis and planning software; or robotics on assembly lines. The challenge now is to move beyond optimization of known processes. In order to generate new jobs—most of the old ones aren’t coming back—the economy needs to utilize the computing and communications resources to do new things: cure suffering and disease with new approaches, teach with new pedagogy, and create new forms of value. Rather than optimization, in short, the technology revolution demands breakthroughs in innovation, which as we will see is concerned with more than just patents.

There are of course winners in the business arena. But in the long run, the companies that can operate at a sufficiently high level of innovation and efficiency to win in brutally transparent and/or low-margin markets are a minority: Amazon, Apple, Caterpillar, eBay, Facebook, and Google are familiar names on a reasonably short list. Even Dell, HP, Microsoft, and Yahoo, leaders just a few years ago, are struggling to regain competitive swagger. Others of yesterday’s leaders have tumbled from the top rank: Merrill Lynch was bought; General Motors and Chrysler each declared bankruptcy. Arthur Andersen, Lehman Brothers, and Nortel are gone completely. How could decline happen so quickly?

Given our era’s place in the history of technology, it appears that structural changes to work and economics are occurring. To set some context, consider how mechanization changed American agriculture after 1900. Because they allowed fewer people to till the land, tractors and other machines drove increased farm size and migration of spare laborers to cities. Manufacturing replaced agriculture at the core of the economy. Beginning in 1960, computers helped optimize manufacturing. Coincident with the rise of enterprise and then personal computing, services replaced manufacturing as the main employer and value generator in the U.S. economy. In short, innovation could be to information what mechanization was to agriculture: the agent of its marginalization and the gateway to a new economic era.

How IT relates to this shift from manufacturing to services and, potentially, a new wave of innovation is still not well understood; to take one example, as Michael Mandel argued in Bloomberg Businessweek, a shortfall of innovation helps explain the misplaced optimism that contributed to the financial crises of the past years. But rather than merely incant that “innovation is good,” I believe that the structure of economic history has certain limits, and computers’ propensity for optimization may be encountering one such limit. It takes people to innovate, however, and identifying both the need as well as the capabilities and resources necessary for them to do so may be a partial path out of the structural economic stagnation in which we find ourselves.

Consider Dell, which achieved industry leadership in the 1990s through optimization of inventory control, demand creation, and the matching of the two. The 2000s have treated the company less well. Apple, which like Dell boasts extremely high levels of supply chain performance, has separated itself from the PC industry through its relentless innovation. Seeing Apple pull away with the stunning success of the iPhone, Google in turn mobilized the Android smartphone platform through a different, but similarly effective, series of technical and organizational innovations. In contrast to Apple and Google, optimizers like Dell are suffering, and unsuccessful innovators including Nokia are making desperate attempts to compete. Successful innovation is no longer a matter of building better mousetraps, however: The biggest winners are the companies that can innovate at the level of systems, or platforms.

The Macro Picture

At the risk of missing some important nuances, three broad issues—globalization, the shift from manufacturing to services, and stagnant middle-class wage growth—need to be considered in tandem with the technology and associated business changes that serve as the primary focus of this book. It should be noted at the outset that coincidence does not imply causation: To assert that the rise of the information era happened in the same period as a transition from manufacturing to services should not be taken to say one caused the other. In fact, some other dynamic may have caused both. That said, powerful forces need to be acknowledged before analyzing the technology sector by itself. We have more to say about each of the topics in the coming chapters.

Globalization

The rise of globalization (regardless of how it is defined) and the rapid diffusion of the Internet and mobile phones are neatly aligned in time, taking off around 1989. Figure 1.2 shows one effort to measure globalization, building on three factors: Economic, social, and political inputs all inform this index, which was created by KOF, a Swiss think tank. These are imprecise measures, to be sure, but it is difficult to argue, even anecdotally, that the world is less “global” than it was 20 years ago.

In addition, the developing world in particular is being transformed by extremely rapid adoption of cellular phones and mobile data. We address this phenomenon in more detail in chapter 12, but note the similarity of the curves in Figure 1.3 showing the same effect in disparate countries: Usually after competition is introduced into a market, people find a way to either buy or gain access to phones for health, economic, and familial reasons.

Rise of the Services Sector

After about 1950, the manufacturing sector declined as a component of U.S. gross domestic product (GDP). Services, whether provided by banks, retail shops, hairstylists, the health care sector, or professionals such as lawyers for government employees, grew at a stunning rate in both employees and economic impact. As Figure 1.4 illustrates, given that governments lagged private companies in shedding jobs after 2008, government (an additional component of the services sector) was actually larger than goods-producing employment.

Stagnant Middle-Class Wage Growth

In the United States as well as other western nations and Japan, per capita income has remained nearly flat in real dollars since about 1970, as Figure 1.5 shows. Thus, the computer can be argued to have introduced efficiency improvements into the economy, but only the top 20 percent of wage earners harvested the majority of those gains.

In short,

* U.S. workers are competing with producers of goods and services in many lands.

* Most U.S. workers have not seen real wage increases in decades.

* American workers are increasingly unlikely to make things.

Why these things happened at the same time as the rise of computing remains a puzzle.

Earthquakes Every Year

Switching from macro context to the topic at hand, it is a commonplace to state that we live in extraordinary times. Rather than merely assert this, however, it doesn’t take a lot of digging to find data: In nearly every year for the past 15, a new industry has been jump-started, an old one crippled, or a new way of looking at the world propagated. Consider a quick timetable that ignores such developments as PayPal, Wikipedia, Twitter, Craigslist, AOL, online mapping, or the iPod:

1995 Adoption of the Netscape browser goes from 0 to 38 million users in 18 months, the world’s fastest technology take-off to date.

1996 Windows 95 sells 1 million copies in its first four days on the market, many through physical retailers, and later serves as gateway to the Net for millions of users via Internet networking support, CD-ROM, and native modem drivers.

(Continues…)

Excerpted from Information, Technology, and Innovationby John M. Jordan Copyright © 2012 by John Wiley & Sons, Ltd. Excerpted by permission of John Wiley & Sons. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.