Trend Towards Routine Innovation

Abstract

Companies are not tinkering around anymore or waiting for a radical innovation to evolve, but trying to routinize innovation. This trend is supported by the standardization of development processes, miniaturization and modularization of products, as well as a shift from competition to co-opetition.

Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor…comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe…. History teaches us that economic growth springs from better recipes, not just from more cooking.

Paul Michael Romer, American Economist, born 1955

The Economist: Smart systems: Augmented business

Smart systems will disrupt lots of industries, and perhaps the entire economy

© The Economist Newspaper Limited, London (Nov 4th 2010)

CALL it the democratisation of sensors. Pachube (pronounced “patch-bay”), a start-up based in London, offers a service that lets anybody make sensor data available to anyone else so they can use them to build smart services. One tinkerer has Pachube’s computers control the fan in his office, guided by temperature readings uploaded from a thermometer on his desk.

Such experiments are free, but those who develop more serious applications and do not want them to be available to anyone else have to pay. Usman Haque, Pachube’s boss, hopes that more and more firms will do so as sensors multiply.

Pachube’s business model is one of the more interesting attempts to make money from the convergence of the physical and the digital worlds, but there are plenty of other firms trying to cash in on smart systems. Many will fail, but those that succeed will disrupt more than one industry and perhaps the economy as a whole.

But what is most exciting about smart systems is the plethora of new services and business models that they will make possible. “The internet of things will allow for an explosion in the diversity of business models,” says Roger Roberts, a principal at McKinsey and one of the authors of a recent study on the industry.

It is not just utilities that will benefit from smart systems but other sectors too. The chemical industry, for instance, has already installed legions of sensors and actuators to increase its efficiency. Others are just starting. In the paper industry, according to the McKinsey study, one company achieved a 5% increase in its production by automatically adjusting the shape and intensity of the flames that heat the kilns for the lime used to coat paper. FoodLogiQ, a start-up, allows food suppliers to tag and trace their wares all along the supply chain—and consumers to check where they come from. Sparked, another start-up, implants sensors in the ears of cattle, which lets farmers monitor their health, track their movements and find out a lot of other things about their animals that they never realised they wanted to know. On average, each cow generates about 200 megabytes of information a year.

Thanks to detailed digital maps, maintaining such things as roads and equipment will also become much more efficient. Asfinag, an Austrian firm, used aeroplanes equipped with special cameras to map the country’s highways. Its employees can now fly over them digitally and even see what is underground. San Francisco’s Public Utilities Commission knows the exact co-ordinates of every waste-water pump, its maintenance history and the likelihood of it failing. “Firms can now send out maintenance crews before things actually break,” says Steve Mills, who heads IBM’s software business. “Making the old stuff run better will be the most important benefit of such systems in the short run.”

Moreover, smart systems make new forms of outsourcing possible, some of it to unexpected places. Pacific Control is not exactly a household name, but the company, based in Dubai, claims (with some justice) that it is the “world leader in automation solutions”. Its global command centre remotely monitors buildings, airports and hotels, keeping an eye on such things as energy use, security and equipment. For the moment most of the firm’s customers are in Dubai itself, but it should find more than a few abroad.

Significantly, once devices are connected and their use can be metered, there is no longer any need to buy them. Already some makers of expensive and complex equipment no longer sell their wares but charge for their use. Rolls-Royce, for instance, which makes pricey aircraft engines, rents them out to airlines, billing them for the time that they run. Makers of blood-testing equipment have taken to charging only if the device actually produces usable data. And Joy Mining Machinery, a maker of mining equipment, charges for support by the tonne.

Some firms are using metering in innovative ways. Zipcar and other car-sharing firms, for instance, put wireless devices with sensors into their vehicles so that customers can hire them by the hour. And insurance firms, among them Progressive in America and Coverbox in Britain, ask customers to install equipment in their cars that can measure for how long, how fast and even where a car is driven. Premiums can then be based on individual drivers’ behaviour rather than on such proxies as age and sex.

Michael Chui, a co-author of McKinsey’s report on the internet of things, says that such applications will allow companies to “have a much more dynamic interaction with customers”. In Japan, for instance, vending machines can recognise a customer’s age and sex and change the message they display accordingly.

The more data that firms collect in their core business, the more they are able to offer new types of services. By continuously assessing the performance of its jet engines around the world, Rolls-Royce is able to predict when engines become more likely to fail so that customers can schedule engine changes. Heidelberger Druckmaschinen, whose huge presses come with more than 1,000 sensors, has started offering services based on the data it collects, including a website that allows customers to compare their productivity with others. “Many companies will suddenly discover that their main business is data,” says Paul Saffo, a Silicon Valley technology forecaster who wrote a widely noted essay on the impact of ubiquitous sensors back in 1997.

Hewlett-Packard is a prime candidate for such a Saffo moment—if its plans to scatter millions of sensors around the world come to fruition. It is doing this to increase demand for its hardware, but it also hopes to offer services based on networks of sensors. For instance, a few thousand of them would make it possible to assess the state of health of the Golden Gate bridge in San Francisco, says Stanley Williams, who leads the development of the sensors at HP. “Eventually”, he predicts, “everything will become a service.”

Apple, though it prides itself on its fancy hardware, is already well on its way towards transforming itself into a service and data business thanks to the success of its iPhone. When the computer-maker launched the device in June 2007, it did not expect “apps”, the applications that run on smartphones, to become such a big deal. The “App Store”, where users can download these pieces of software, was launched a year after the first iPhone was shipped. But the App Store now sells more than 250,000 apps that have been downloaded over 6.5 billion times. And with its new platform for mobile advertising, called iAd, Apple has started to make money from all the data it collects.

Some firms will make a living based entirely on mining “data exhaust”, the bits and bytes produced by other activities. One example is Google’s PowerMeter, which not only lets users check their use of electricity online but gives Google access to lots of data to analyse and, not least, sell advertisements against.

Conventional services, too, can be metered. Those supplied by governments may not be the first to spring to mind but, as a study by the Dutch economics ministry asks, why not use sensors for taxing things like pollution? That might be uncontroversial, but analytics software could also be put to more manipulative uses by fine-tuning charges for public goods to get citizens to behave in certain ways.

Much of the innovation in this field may come not from incumbents but from newcomers, and it may happen fastest on such platforms as Pachube. In a way it is a cross of YouTube and Windows. What made the video-sharing site so popular was the way it converted all videos to a common format. Pachube is doing the same for data feeds from sensors. And like Microsoft’s operating system for applications, it provides basic features for smart services, such as alerts, data storage and visualisation tools.

This spring at Where 2.0, a technology conference in Silicon Valley, the star of the show was Skyhook Wireless, a firm that offers geographical-location information as a service. It recently launched a new offering called SpotRank. Drawing on all the data it has collected in recent years from apps using its services, the firm can predict the density of people in specific urban areas—anywhere, any day and at any hour. “This will give us great insights into human behaviour,” says Brady Forrest, the chairman of the conference.

Another hit at the conference was a service called Wikitude. Its “World Browser”, a smartphone app, checks the device’s location as well as the direction in which its camera is pointing and then overlays virtual sticky notes other users have left about things like local landmarks. So far Wikitude and similar services are mostly used as travel guides. But in principle users could collaboratively annotate the entire physical world—and even other people. TAT, another start-up, already experiments with something called “Augmented ID”, which uses facial recognition to display information about a person shown on a smartphone’s screen.

It is difficult to say what effect all this will have on business and the economy. But three trends stand out. First, since smart systems provide better information, they should lead to improved pricing and allocation of resources. Second, the integration of the virtual and the real will speed up the shift from physical goods to services that has been going on for some time. This also means that more and more things will be hired instead of bought. Third, economic value, having migrated from goods to services, will now increasingly move to data and the algorithms used to analyse them. In fact, data, and the knowledge extracted from them, may even be on their way to becoming a factor of production in their own right, just like land, labour and capital. That will make companies and governments increasingly protective of their data assets.

In short, we may be moving towards a “Weightless World”, the title of a 1997 book by Diane Coyle about a future in which bytes are the only currency and the things that shape our lives have literally no weight. But for now, gravity has not quite been repealed yet.