Version 2 Consulting & Representation

Innovation is a tricky thing that can be divided into two parts:  idea and execution.  We often hear that ideas are cheap and execution is difficult but in this post I want to focus on the idea-half of the equation, and more specifically, incremental innovations so ubiquitous in the technology arena.

As the proverb says, necessity is the mother of invention.  But how do we define necessity?  Making something better often has nothing to do with necessity, at least until people get used to it.  Ex:  Wheeled luggage:  When introduced/perfected in the 1990s it certainly was not considered a necessity.  In fact, macho types frequently eschewed the convenience of wheels due to the “wimp” factor.  These holdouts eventually gave up their principles and doubtlessly consider wheels a necessity today.

Without an obvious necessity–such as fossil fuel alternatives–the idea portion of innovation becomes more difficult.  How so we recognize a “fact” of life as a solvable problem?  Almost daily, I stumble on to some new feature, application, or web site that proposes to solve an inconvenience that I never recognized as a obvious case for innovation.  Think of the following innovations and ask yourself if you ever considered the problem any more than inconvenience of modern life.

• Problem:  Sending an email and immediately realizing after pushing the send button that their is a typo or some more grievous error.  Solution:  In Gmail, for example, you can set a time period (ex 30 seconds) where you can undo the send.  In other words, the simple solution, just holds the email for 30 seconds before sending.

• Problem:  Waiting on hold or trying to find a human to talk to at any customer service number.  Solution:  Lucyphone is a clever little service that allows you to provide the company/department you want to talk to (ex. American Airlines, baggage) and a phone number where you can be reached.  When a human gets on the line, Lucyphone calls you back and connects you.

• Problem:  Getting a bad room in a good hotel.  Solution:  Room77 provides a customized individual room rating systems for a growing database of hotels based on factors such as view, proximity to the elevator, connecting rooms etc.  The idea is to get the best room within a category based on your criteria.

Each of these examples are incremental innovations on services we have come to view as necessities:  email, telephone customer service, and on-line hotel ratings.  But more to the point, they each attempt to solve a problem previously viewed as inherent in life.  Recognition that irritants in life can be viewed as limitless source of innovative ideas helps solve the idea-half of the innovation equation.  I guess one could say that irritation and complaints are the mothers of incremental innovation.

Brazil maintains one of the world’s highest levels of protection for its electronics manufacturing industry. Indeed, in the name of protecting local industry, the government has imposed duties and taxes that result in cell phone prices roughly double those faced in the rest of the world.  Brazilian consumers have accepted this burden with little complaint.  Nevertheless, this protection has not prevented the failure of nearly all Brazilian and other 2nd tier handset manufacturers.

The problem is this:  At the same time the government has been protecting the industry via high import tariffs, they have imposed such high fixed costs on each new handset model that a very high volume is necessary to  justify the launch of any new product.

• Anatel.  The Brazilian equivalent of the FCC imposes ever more expensive approval requirements.  The agency now requires the testing and certification of not just the handset, but also the charger and the battery.  For a 3G phone with multiple bands, Anatel certification costs can exceed $50,000 per model.

• Local sourcing requirements for handset batteries and chargers.   There are few local suppliers of chargers and batteries and for the latter, minimum production runs are very high.  Local battery and chargers costs are three times the fob Asia costs.

• Local assembly requirements:  Ironically, the tax law originally made to benefit the local manufacturers also contributes to their demise.  The fixed costs to begin CKD production for a new model are very high and can add $3 or more dollars per unit for production runs under 50K.

None of the local or second tier firms have the scale to profitably absorb these fixed costs.  Also, there is no cost effective way to test a new model or “dip your toe” in the market.  Hundreds of thousands of dollars are required just to have a single unit available for sale.  That is before any marketing dollars are spent.

Albeit at a high cost per job and a heavy burden on consumers, most cellphones sold in Brazil are indeed manufactured here.  With few exceptions, however, Brazilian firms are not the ones doing the manufacturing.