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Cluster Funk

I recently attended another one of those economic development summits where a bunch of people with long titles gets a chance to speak on a panel touting the mysterious benefits of a mysterious innovation clusters that create mysterious wealth that can only be realized if their mysterious department is funded.

Nearly every speaker concluded with the following paraphrase: “if only government would fund this or that, everything will be fine”, or, “if only corporations would fund this or that, then we’ll all be better off”

Uhmmm…sorry to break the news, it ain’t gunna happen.

Innovation clusters are all the rage in regional economic development circles. Actually, they are “industrial clusters” because several companies in similar industries collocate in the same geographical area. The industrial cluster then attracts supporting industry and often causes the migration of educated and motivated people to the prospect of jobs. I suspect the ‘innovation’ moniker comes from the notion that new ideas will somehow result from similarity of ideals and purpose.

Group Think Tanks

There are, however, a few drawbacks to industry clusters; they are vulnerable to stagnation, silos, and external shocks. As companies become organized and technologies mature, patents and trade secrets take hold. As they ‘go public’, SEC regulation effectively places a gag order on everyone and sharing slows while stagnation sets in.

Soon after, dozens of nimble companies consolidate into a single giant to achieve economies of scale. Finally, silos form under the weight of multiple layers of management while jobs are mechanized or outsourced.

Then, something somewhere happens to shock the cluster; the end of the cold war leveled the So Cal aerospace cluster. 9/11 busted the Seattle Aerospace cluster. The dot.com bomb stunted Seattle, Silicon Valley, and Route 128. Hurricanes and environmental disasters hit the petroleum cluster, stem cell and genetic engineering legislation stalled biotechnology, and corruption continues to shock financial institutions. At the end of the cycle, companies divest, people defect and a new planet starts to form someplace else.

Remember “scrubbing bubbles”?

While occasional cleansing, in a Schumpeterian sense, is good for industries, the extreme volatility takes a horrendous toll on that invisible turbine of the economic engine – social fabric. Families, friendships, professional networks are strained or collapse and those who dedicate their life to a career path – the pure innovator themselves – can be left marginalized by obsolescence.

The term “Innovation Clusters” makes for a good soundbite for politicians because it fits on the “Jobs R Us” banner they can stand in front of (thumbs up) for the next election cycle.   The term keeps funds flowing to organizations to publish studies that conclude that more studies are needed. Maybe these summits ought to be renamed to Cluster Funks because that is largely what they actually promote.

Social Enterprise; Innovation Clusters

Innovation clusters are all the rage in regional economic development circles.  Actually, they are “industrial clusters” because several companies in similar industries collocate in the same geographical area.  The industrial cluster then attracts supporting industry and often causes the migration of educated and motivated people to the prospect of jobs.  I suspect the ‘innovation’ moniker comes from the notion that newer industries locate near centers of venture capital, like planets forming from the dust of the cosmos.

There are, however, a few drawbacks to industry clusters; they are vulnerable to stagnation, silos, and external shocks.  As companies become organized and technologies mature, patents and trade secrets take hold.  As they ‘go public’, SEC regulation effectively places a gag order on everyone and sharing slows while stagnation sets in. Soon after, dozens of nimble companies consolidate into a single giant to achieve economies of scale.  Finally, silos form under the weight of multiple layers of management.  Then, something somewhere happens to shock the cluster; the end of the cold war leveled the So Cal aerospace cluster. 9/11 busted the Seattle Aerospace cluster.  The dot.com bomb stunted Seattle, Silicon Valley, and Route 128.  Hurricanes hit the petroleum cluster, stem cell and genetic engineering legislation stalled biotechnology, and corruption continues to shock financial institutions.   At the end of the cycle, companies divest, people defect and a new planet starts to form someplace else.

While occasional cleansing, in a Schumpeterian sense, is good for industries, the extreme volatility takes a horrendous toll on that invisible turbine of the economic engine – social fabric.  Families, friendships, professional networks are strained or collapse and those who dedicate their life to a career path – the pure innovator themselves – can be left marginalized by obsolescence.

The Calculus of Innovation Economics does not oppose industrial clusters; however, it does favor something called “technology clusters” in a business structure called the “tangential innovation” market.  For example; composite materials technology is very useful in many applications like aircraft, medical devices, transportation, recreation, and even musical instruments.   The airplane company has no intention of building cellos and the automobile company has no intention of building snow boards.  As non-competing industries, they can readily share technology and people.  The system is naturally diversified and inoculated against stagnation, shocks and silos; if one industry encounters hardship, people and capacity can shift easily to another industry preserving knowledge and expanding social networking benefit while the damaged industry heals or dies off.  Corporations may not like this idea, but social networks should.

The science of Innovation Economics goes a step further by modeling the business structure of tangential innovation markets as an integrated financial system.  Suppose and Originator Company has a promising new composite technology idea but is unable to meet the ROI requirements of their stockholders. Today, such innovation would be shelved.  In an innovation economy, tangential markets are factored into the business case.  The Percentile Search Engine can determine what other industries would be most worthy borrowers of your technology, if developed.  The Innovation Bank can estimate the return on investment that can be expected through the tangential market as if it were another customer.  The additional revenue projection would allow the originator to meet the ROI requirement prior to committing development funds.  Intellectual Property can be managed with contracts enforced through social network vetting.  The originator can hold an option to see further development conducted by tangential users effectively multiplying their R&D reach and further adding to the expected return.

Then something magical will happen. At some point, the value of the tangential innovation market would exceed the value of the origination market.  The originator will begin to specialize in pure innovation as a primary product and airplane applications as the secondary product.  As all industries in the technology cluster begin sharing technology among each other, R&D costs and risks are effectively spread across industries. As risk is diversified away, the cost of venture capital approaches single digit rates.

Then, another magical thing will happen. As the mixing of people and ideas accelerates, the definition of corporate boundaries will become more fluid.  Ownership will exist in the form of contracts among entrepreneurs now defined by social networks, options, and derivatives in a diverse innovation enterprise.

The knowledge inventory will house the assets rather than office cubicles.  The ‘secret sauce’ of knowledge asset allocation becomes more tangible, safer, flexible, and liquid than any patent could ever be.  Innovation will always be proportional to the rate of change of knowledge that the more diverse assets yields. The Percentile Search Engine will match surplus “secret sauce” to deficits of “secret sauce” much better than multiple layers of management in the past. The Innovation Bank will account for all transactions, obligations, and participation and distribute dividends (rather than hourly wages) to the owners of knowledge assets.  The system will regulate itself through social vetting rather than supporting a cumbersome HR department.

New ideas will get developed in the technology cluster where they would never have been able to meet ROI in the industrial cluster.  The innovation economy induces a multiplier effect on innovation by reducing risk, eliminating barriers to sharing ideas, and lowering the cost of capital.

While the boom bust cycle of Industrial Clusters has brought us a great distance in economic development, technology clusters in an Innovation Economy supported by social networks may turn out to be vastly more efficient at economic growth without the vulnerabilities of industry clusters.

Social Networks and the Multiplier Effect on Innovation

If we combine the parallel transaction with the series transaction we have what now looks like a neural network. In practice, we know that strong networks of people freely exchanging ideas make organizations better, smarter, and more efficient. Networks are where knowledge and wisdom is literally stored. A network is fault tolerant, if one person leaves, the network survives. For a relatively small input into a network, we can produce a large output of new knowledge – we have a learning organization.

However, in society, these interactions are largely accidental; people meet at Church, Starbucks, and Social Events or by word of Mouth. Other times, these interactions are concentrated inside a single community of very similar people such as a technical conference, group meeting, or lunch buddies and are often not well diversified.

Suppose the interactions among people were not random, instead, they could be designed by the entrepreneur to produce a unique outcome. The Innovation Bank will combine people of complementary knowledge assets in a calculated manner in order to arrive at specific business approaches and applications.

A special case of the above business method and resulting social network is called the Multiplier Effect. A financial bank enjoys a multiplier effect with the ability to lend the 10 times more money than they hold in reserve. Money changing hands has a multiplier effect on an economy. Again, financial analogies hold.

Suppose that a company owns composite material technology for use on aircraft. Since they specialize in airplanes, they have no intention of pursuing other applications such as recreational equipment, energy production, or health care products.

Suppose that the company could deposit this asset in a bank and collect interest. The Search Engine can scan the business landscape to find companies with a knowledge deficit in the area of your technology and make loans of your technology. As the originator, you have the option to see what those other companies invent and you hold the right to use their new ideas in your aircraft application.

With an innovation Bank, you can reduce your Research and Development costs and create additional revenue in a tangential innovation market. With reduced cost and risk of innovation, you are likely to specialize more and more in innovation as your enterprise. In the event of a cyclic downturn in the business of an originator, instead of “laying off” knowledge assets, people can work in tangential industries where they will continue developing – literally putting “Knowledge in the Bank” – to be called back when market conditions improve. A mobile knowledge asset increases in value becoming smarter and more productive over time.

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