Test Tube Companies

Quick question: who is the major funder of new technology in communications?

__Bell Labs
__Industry
__Universities
__The U.S. Government

If you answered U.S. Government, go to the head of the class. Bell Labs hasn't been a major factor since before divestiture; industry is in the business of development, not research; Universities do research - but always because it is sponsored by ... our government.

Half the academics spend most of their time writing grant requests to keep their labs going. The Internet of course is the prime example of the government-university alliance, but you could also list 50 others, beginning with Google.

Of course, the venture capital industry hangs around university labs like dope dealers, trying to figure out which of these developments to back and which are dry holes. The problem with academics is that they are . . . academics. They make their bones by writing illucid articles in obscure publications whose readership numbers rank in the . . . dozens.

Further, academics don't actually develop products . . . they develop processes. So it is the peculiar genius of the venture capitalist to figure which of these processes can both be protected by patents and which might be turned into real products. Then there is the age-old question - do you recruit the academic into the company . . . or leave him in place?

One advantage of the latter is that you really need expertise . . . and the smart graduate students whose names are at the end of the monograph,but who did the real work. Add to this: you want the academic to stop publishing, because those monographs just help the competition. Twenty years ago, you could tell which solution IBM was following because the losers in the bake-offs published, the winners just shut up. Let us not forget that Oracle got its start when Larry read about databases in the "IBM Systems Journal." In that case, the "loser" became the winner.

The days of the individual inventor seem numbered. Samuel Morse was a portrait painter living in England who wanted a way to send messages to his children in the United States while he was away. Marconi was the son of a wealthy family who indulged him.

Bigger question: since so much of our technology comes from university research, why hasn't management science followed hard science in its lessons? Are our companies better managed today than they were 20 years ago? I don't think so and neither do you. Motorola? Nortel? Please.

What does a university researcher do? The researcher first sets up a hypothesis. Then tests. Either the hypothesis is proved or disproved. If proved, the researcher forms a new hypothesis, then tests again.

But we in business give lip service to this, but rarely do. Example: We do a potential internal rate of return (IRR) on a new process or product, we run spreadsheets way into the future . . . and then we never go back to see if our earlier assumptions and hypothesis were correct.

I have been teaching in first-rate universities for almost 10 years (MIT, Dartmouth, Indian School of Business), and I can tell you that not only do we not teach scientific methodology in business, we don't even suggest it. Yes, they do some of this testing in marketing, but almost nowhere else.

Think of a modern corporation in Darwinian terms. Darwin taught us that each species will occasionally produce mutants, most of which are not susceptible to survival, but some are more adept to their environment and multiply.

There are exceptions. Most of what we call management science does begin in either very well-run companies or in universities. The first to jump on this are the high-end consultants, who write self-aggrandizing books and build palatial homes on their ability to execute. Think Six Sigma or Lean Manufacturing or Co- Development. Within a few years, these new management techniques are part of the DNA of well-run companies such as GE, Intel, P&G.

They no longer need the consultants so the consultants must move onto second-tier firms. Sometimes these firms will hire from the first-tier firms just to get the execution expertise.

Young start-ups are at the end of the food chain, and often the lessons are inappropriate. A large company may need sophisticated tools to decide which of several R&D projects should be pursued or abandoned. The start-up is faced with only one issue: survival. That tends to focus the mind.

The major problem of the larger company is the inability to grow. "Organic" growth is what every CEO wants, but after a while this becomes harder and harder, especially when the product lines become more mature. Having become cynical of one's internal ability to generate new products/growth, the CEO must then move toward a more risky strategy - acquisition. Even knowing that most fail, there is little choice. The tricky part is assimilating the new company in the old. This is where Cisco's expertise is the new coin of the realm. By understanding how to bring test tube companies into the mainstream, the older organism gains hybrid vigor.

So what we have, even with all these consultants, is a better way to run a more efficient company, but they have not solved the effectiveness issue: growth.

Here's another problem: As a technology company grows, its need for bigger and bigger acquisition also grows. But how many little companies can it absorb? Twenty-five? Fifty?

Of great frustration to technology CEOs is why they seem so unable to grow these firms internally - and at a reasonable price. Usually when a new technology comes along, it is unstable but threatening, wholly inappropriate. But often it will find a new, less demanding market. Think VoIP. After the poobahs get over their denial, they find that some of their customers are trying the technology - albeit far away from the watchful eyes of corporate. If it works, it goes from experiment to mainstream.

Usually at this point, the Corporate R&D guys get quite upset that the train is leaving without them - so they mount a feeble effort, which is too little, too late. They attempt to convince their best customers that they should stay with the old technology, but if they really want to try this new stuff, well, it's here.

When that fails, the investment bankers pop up like mushrooms, suggesting that the only real solution is the purchase of the new technology company - which usually results in killing whatever initiative it had in the first place.

This is when financial engineering replaces real engineering. The first great leaders were the technologists. They were followed by the sales/marketing CEOs. And finally comes the financial geniuses who can try to morph these staid older companies into sprightly youngsters.

Never works.

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Quick question: who is the major funder of new technology in communications?

__Bell Labs
__Industry
__Universities
__The U.S. Government

If you answered U.S. Government, go to the head of the class. Bell Labs hasn't been a major factor since before divestiture; industry is in the business of development, not research; Universities do research - but always because it is sponsored by ... our government.

Half the academics spend most of their time writing grant requests to keep their labs going. The Internet of course is the prime example of the government-university alliance, but you could also list 50 others, beginning with Google.

Of course, the venture capital industry hangs around university labs like dope dealers, trying to figure out which of these developments to back and which are dry holes. The problem with academics is that they are . . . academics. They make their bones by writing illucid articles in obscure publications whose readership numbers rank in the . . . dozens.

Further, academics don't actually develop products . . . they develop processes. So it is the peculiar genius of the venture capitalist to figure which of these processes can both be protected by patents and which might be turned into real products. Then there is the age-old question - do you recruit the academic into the company . . . or leave him in place?

One advantage of the latter is that you really need expertise . . . and the smart graduate students whose names are at the end of the monograph,but who did the real work. Add to this: you want the academic to stop publishing, because those monographs just help the competition. Twenty years ago, you could tell which solution IBM was following because the losers in the bake-offs published, the winners just shut up. Let us not forget that Oracle got its start when Larry read about databases in the "IBM Systems Journal." In that case, the "loser" became the winner.

The days of the individual inventor seem numbered. Samuel Morse was a portrait painter living in England who wanted a way to send messages to his children in the United States while he was away. Marconi was the son of a wealthy family who indulged him.

Bigger question: since so much of our technology comes from university research, why hasn't management science followed hard science in its lessons? Are our companies better managed today than they were 20 years ago? I don't think so and neither do you. Motorola? Nortel? Please.

What does a university researcher do? The researcher first sets up a hypothesis. Then tests. Either the hypothesis is proved or disproved. If proved, the researcher forms a new hypothesis, then tests again.

But we in business give lip service to this, but rarely do. Example: We do a potential internal rate of return (IRR) on a new process or product, we run spreadsheets way into the future . . . and then we never go back to see if our earlier assumptions and hypothesis were correct.

I have been teaching in first-rate universities for almost 10 years (MIT, Dartmouth, Indian School of Business), and I can tell you that not only do we not teach scientific methodology in business, we don't even suggest it. Yes, they do some of this testing in marketing, but almost nowhere else.

Think of a modern corporation in Darwinian terms. Darwin taught us that each species will occasionally produce mutants, most of which are not susceptible to survival, but some are more adept to their environment and multiply.

There are exceptions. Most of what we call management science does begin in either very well-run companies or in universities. The first to jump on this are the high-end consultants, who write self-aggrandizing books and build palatial homes on their ability to execute. Think Six Sigma or Lean Manufacturing or Co- Development. Within a few years, these new management techniques are part of the DNA of well-run companies such as GE, Intel, P&G.

They no longer need the consultants so the consultants must move onto second-tier firms. Sometimes these firms will hire from the first-tier firms just to get the execution expertise.

Young start-ups are at the end of the food chain, and often the lessons are inappropriate. A large company may need sophisticated tools to decide which of several R&D projects should be pursued or abandoned. The start-up is faced with only one issue: survival. That tends to focus the mind.

The major problem of the larger company is the inability to grow. "Organic" growth is what every CEO wants, but after a while this becomes harder and harder, especially when the product lines become more mature. Having become cynical of one's internal ability to generate new products/growth, the CEO must then move toward a more risky strategy - acquisition. Even knowing that most fail, there is little choice. The tricky part is assimilating the new company in the old. This is where Cisco's expertise is the new coin of the realm. By understanding how to bring test tube companies into the mainstream, the older organism gains hybrid vigor.

So what we have, even with all these consultants, is a better way to run a more efficient company, but they have not solved the effectiveness issue: growth.

Here's another problem: As a technology company grows, its need for bigger and bigger acquisition also grows. But how many little companies can it absorb? Twenty-five? Fifty?

Of great frustration to technology CEOs is why they seem so unable to grow these firms internally - and at a reasonable price. Usually when a new technology comes along, it is unstable but threatening, wholly inappropriate. But often it will find a new, less demanding market. Think VoIP. After the poobahs get over their denial, they find that some of their customers are trying the technology - albeit far away from the watchful eyes of corporate. If it works, it goes from experiment to mainstream.

Usually at this point, the Corporate R&D guys get quite upset that the train is leaving without them - so they mount a feeble effort, which is too little, too late. They attempt to convince their best customers that they should stay with the old technology, but if they really want to try this new stuff, well, it's here.

When that fails, the investment bankers pop up like mushrooms, suggesting that the only real solution is the purchase of the new technology company - which usually results in killing whatever initiative it had in the first place.

This is when financial engineering replaces real engineering. The first great leaders were the technologists. They were followed by the sales/marketing CEOs. And finally comes the financial geniuses who can try to morph these staid older companies into sprightly youngsters.

Never works.

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